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Achipelago Joins Forces with The Pacific Exchange; All-Electronic Equity Market on the Horizon

Archipelago will provide the Pacific with a trading engine that will serve as the heart of its equity business.

NYSE and Nasdaq, beware. In a deal that could significantly raise the bar of competition in the U.S. equity markets, Archipelago LLC---a Chicago-based electronic communications network (ECN)---last week formed a partnership with the Pacific Exchange. The agreement calls for Archipelago to provide the Pacific with a trading engine that will serve as the heart of its equity business, eventually phasing out the exchange's stock trading floors in Los Angeles and San Francisco. The Pacific, which will act as the regulator of its reinvented equity market, will receive a minority stake in Archipelago---an ECN that already lists Goldman Sachs, J.P. Morgan, Merrill Lynch and E*Trade among its owners.

The combined equity market expects to have the ability to trade all of the listed and over-the-counter stocks traded by the major U.S. equity exchanges. "We will trade Nasdaq, NYSE and AMEX stocks…. and this is going to make the U.S. landscape more competitive, because now investors are going to have an alternative to the existing market centers," says Archipelago chief executive officer Gerald Putnam.

Besides trading the stocks listed by rival markets, the new equity market also intends to compete with the likes of the NYSE by attracting new listings of its own. The shared vision of Archipelago and the Pacific, says Putnam, is to design an all-electronic national stock market that emphasizes direct and easy access, low costs and price transparency. Those types of features, he says, should help the partners lure issuers to their market. "Any issuer is going to look at an opportunity to list their shares on a technologically advanced, automated stock exchange," he says. Before bringing their vision to the market, however, the partners still must receive regulatory approval from the SEC. In the near future, says Putnam, the partners will file a "new set of rules" for their combined market with the commission. The partners expect the SEC to approve those rule changes, and hope to launch their reinvented market by the end of this year.

In the meantime, an Archipelago filing that petitioned the SEC to grant the ECN exchange status has been put on indefinite hold. Last year, Archipelago filed an application to become a self-regulated stock exchange. But that filing has been "suspended," says Putnam, and will be abandoned all together---once Archipelago gets SEC approval for the Pacific alliance. With the Pacific as its ally, Putnam says that Archipelago should be able to more quickly reach the goals its set when it initially filed for exchange status. "We're placing the same bet here. We're going to operate, with the PCX, an all-electronic national securities exchange," he says. "Basically, Archipelago will use its technology to run the equities business, while the Pacific will continue to operate the exchange and provide regulatory services."

Part of the reason Archipelago decided to partner with the exchange was because it was ahead of the demutualization curve. Last October, the exchange became the first U.S. equity market to get member approval on a plan to convert form being member-owned to shareholder-based. Philip DeFeo, chairman and CEO of the Pacific, says that the SEC has released the exchange's for-profit application for public comment-and approval for the application is "imminent."

It is still unclear, however, whether the existing 552 members of the Pacific---who will become shareholders when the exchange goes for-profit---will eventually own a chunk of Archipelago. Both Putnam and DeFeo decline to provide details about the monetary component of their firms' partnership.

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