By Senior, Adriana
American Banker , Vol. 164, No. 111
J.P. Morgan & Co. said Thursday that it had agreed to acquire a 20% interest in Archipelago, one of a new breed of networks that is bringing rapid change to securities trading processes.
The dollar amount to be invested in Archipelago Holdings LLC of Chicago was not disclosed. The Morgan investment would follow similar ones by Goldman Sachs Group and E-Trade Group, indicating the high level of interest in such electronic communications networks, or ECNs, from the investment banking community.
J.P. Morgan has a history of participating in trading and clearing infrastructures and sees its involvement in Archipelago as part of an effort "to pull a fragmented marketplace together," said Robert C. Gasser, the New York banking company's head of U.S. equity trading.
Archipelago was one of the first four ECNs to gain Securities and Exchange Commission approval in January 1997, and such entities now account for 30% of Nasdaq activity.
They pose a challenge to traditional trade-execution methods by bypassing the market makers who profit from pricing spreads.
In competition with other ECNs-the largest are the Reuters Group subsidiary Instinet and Island ECN Inc.-Archipelago touts its execution capabilities and says it is the only one with major investors from both the institutional and retail financial service sectors. It said its average daily volume has more than doubled since December.
J.P. Morgan regards Archipelago as offering the best execution for clients in terms of price, speed, and size of orders, said Mr. Gasser.
In the same technological vein, Morgan announced earlier this week that it and PricewaterhouseCoopers had developed and launched a protocol to support derivatives trading over the Internet. Morgan also had a pioneering role in developing and spreading its methodology for measuring market risk, known as RiskMetrics.
The explosion of technology has caused the equity marketplace to become fragmented, Mr. Gasser said. The "velocity and volume" supported by the Internet, in addition to free information delivery and seamless communication, "have made it impossible for humans to intermediate the way they used to."
As fast as they are growing, ECNs face challenges in displacing the old way of doing things. One of these is creating liquidity, said James Marks, electronic commerce analyst at Deutsche Bank Alex. Brown. ECNs work best with high-volume stocks that can quickly find matches for executing orders, he said. …