Wednesday, December 29, 2004

Growing ArcaEx-Listed Companies

As of 12/29/2004, ArcaEx has a total of 252 listed companies. Some of these listings are dually listed companies (i.e., listed on NYSE/Nasdaq, etc. and ArcaEx).

Arca has said that they consider growing their number of listed companies as a a key revenue driver. When you consider that the NYSE has over 2,800 companies listed (source: it becomes apparent that the market potential is gigantic.

Here's a list of the currently ArcaEx-listed companies:
Standouts include: American Express. Citigroup, Caterpillar,
Merrill Lynch, and Wal*Mart

And if you want to see just how competitive Arca's listing fees
are compared to the fees that the NYSE charges look below (note:
original listing fees are highlighted to indicate how considerably
different the fees are between ArcaExchange and the NYSE):

ArcaEx Fees:
(original listing fee = dually-listed = $10,000;
Not dually-Listed =$20,000;
No minimum charges)

NYSE Fees:
(original listing fee = $36,800; Minimum fees = $150,000)

This analysis illuminates the forces at play as a business/industry sails the treacherous waters of threats such as disintermediation as well as the evolution of industry, in general. See the post below for competing views on Regulation NMS and its impact on competition.

Tuesday, December 28, 2004

NMS and Competitiveness: Two competing views

(Above: Porter's Five-Forces Model)
Brian Pears, head of equity trading for Victory Capital, spun an editorial in Traders Magazine where he criticizes Regulation NMS. (see article here: Suffice to say, Pears remarks reflect the general sentiment of institutional players that have been raised in a NYSE-country-club environment.

Pears' view regarding Regulation NMS getting in the way of competition in the US capital markets contradicts the views of Jerry Putnam, Arca's CEO. This NMS-competitiveness dichotomy is a microcosm of the larger debate that's taking place about NMS.

Consider Porters Five Forces (see: above or which many regard as the holy grail of understanding competition in terms of marketing (i.e, taking market share):

Here's what I mean:
Pears' View: (source:
[Regulation NMS] carries the potential to completely destroy the competitive, if fragmented, market structure that's existed for years. And it deserves your attention. These proposed changes got me thinking. If our new goal to reinvent markets by making block trading obsolete and killing competition

Putnam's View: (source:
Inter-market trading rules that govern the way exchanges interact with one another are extremely anti-competitive and make it difficult for electronic exchanges like ours to compete with the NYSE

Brian Pears:
It carries the potential to completely destroy the competitive, if fragmented, market structure that's existed for years. And it deserves your attention. These proposed changes got me thinking. If our new goal to reinvent markets by making block trading obsolete and killing competition

Monday, December 27, 2004

BE SURE TO SEE THE NEW ARCANEWS MERCHANDISE: Look in the lower right corner of the page under "I POWER BLOGGER"

Arca's CEO Vision Per Forbes 2003

Here's an interesting dialogue between Arca's CEO, Jerry Putnam and
the CEO Network conducted on August 6, 2003..

Mr. Putnam covers electronic communication networks (ECNs), the future of Nasdaq, the rivalry with Instinet and, his thoughts regarding the idea of taking Archipelago public -- which he did 12 months later. Enjoy!

Friday, December 24, 2004

NYSE Seats Becoming Obsolete

Thursday, December 23, 2004

Shwab Decides to Sell NYSE Seats - Underscores Growing Obsolescence of Antiquated Open-Outcry

This afternoon Schwab announced that it was selling its three NYSE seats. This decision underscores the growing obsolescence of the "floor-based" stock exchange model. You can read about this here:

The Wall St. Journal quotes James Angel, an associate professor of finance at Georgetown University, in the story they published regarding the Schwab sale. Angel said Schwab's decision to get rid of its seats points to the fact that brokerage houses don't need to actually own seats anymore. Memberships, which are called seats because exchange members sat in assigned chairs during the 212-year-old NYSE's early years, confer the right to buy and sell stocks on the trading floor. But 'there are plenty of NYSE members who are happy to provide access,' Mr. Angel said.

The professor, a former visiting academic at the NASD says, "It used to be a matter of prestige for a firm to say, 'We're a member of the New York Stock Exchange,' because it meant that you were a real brokerage firm, but brokerage firms don't have to do that anymore. I don't think most customers really care if they're a member or not. They care about the cost of the execution, about the quality of the services they receive."

Nasdaq and AIG Sever Ties to Avoid Scrutiny

And yet another example of the i
ncestuous nature of the US capital market system. This time its the NASDAQ though.

On 12/23/2004, Reuters published a story that states that American International Group (AIG - the largest insurer in the world according to market cap) is selling its interest in a joint venture it has with NASDAQ.

A spokesman for AIG, which is facing a separate investigation by New York Attorney General Eliot Spitzer, told the Wall Street Journal that AIG, the world's largest insurer by market value, was selling the stake because 'we want to eliminate the appearance of potential conflict.' You can read this brief story here:

Wednesday, December 22, 2004

A Possible Explanation For The Latest Dips

On 12/17/2004, Dow Jones Newswires, Ann Keeton ran a story which explains that an Illionois

jury recommended Archipelago CEO Jerry Putnam pay Fane Lozman, a former business partner, $2.5 million for 'usurpation of corporate opportunities' related to a business the two once owned. Here's a piece from the Chicago Sun Times which explains this case and what happened a decade ago: This article somewhat contradicts the Dow Jones story since it quotes Mr. Putnam's lawyer saying that her client would not have to pay damages. Nonetheless, it's quite possible that he's selling some of his shares for the if-come he'll need to pay Lozman.

In an SEC filing filed earlier, Archipelago said that if Lozman were entitled to monetary damages 'Mr. Putnam may need to satisfy (the claim) through the sale of a portion of his common stock.'

Archipelago is not a party to this suit and subsequently is not on the hook for any monetary damages since the alleged conduct was conducted by Putnam prior to 1996 (when Archipelago Holdings was formed)
monetary damages.

So, if he's selling some stock to pay Fane that would explain why there's been some selling pressure as of late. Given the light volume, it makes it sense that it might take Mr. Putnam several days to sell without hurting the share price.

Former SEC Advisor and Chief Economist at the NASD Rings In

Gene Finn, the chief economist and senior adviser to the SEC from 1969 to 1982 and a chief economist at the NASD for 12 years, wrote an interesting letter to the SEC regarding Regulation NMS. Here's that letter:

He makes some valid points and highlights the need for reform to the US capital market structure.

Thain's Desporate Editorial Piece in the WSJ

Yesterday, NYSE CEO John Thain wrote an editorial in the Wall Street Journal called, "The Quest For the Right Balance." The prose is absurd and it's my pleasure to share a few choice quotes from it. Keeping in mind that Thain's company's future is at stake and the 212 yr. old tradition of fleecing investors is on the verge of being transformed, it's not surprising that Thain doesn't support modernizing the US capital markets structure. Here are some of his whines:

"The SEC has put on the table two alternatives, one of which achieves both these objectives, and the other of which would effectively transform our markets into a homogenized government utility."

Translation: An innovative disintermediated structure damages the NYSE business model. Does Thain propose that US monetary policy should be handled in the private sector, too? Some things are important enough for government intervention -- that's the basis for the creation of the SEC and the NASD. They are doing their jobs by protecting the interests of the public.

Here's another:
Until now, the SEC has successfully maintained the important balance that separates order competition within markets and competition between markets. But one alternative proposed by the SEC eliminates the latter by requiring that markets route orders to any displayed limit order in any market center. Such a proposal would transform our market system into a virtual Consolidated Limit Order Book or CLOB. The CLOB has been proposed in the past, debated at length, and wisely and repeatedly rejected by previous SEC chairmen and commissioners for a number of reasons; foremost among them, it would convert our dynamic, diverse, and internationally competitive markets into a government-mandated, one-size-fits-all monolith."

Translation: In the past, under the guidance of Grasso (a thief who hasn't the pride to come out and face the public since he malfeasance was revealed) and his henchmen, the NYSE was successful in persuading policy makers to let the NYSE do its own thing. History shows us that the NYSE is a self-serving, unfair marketplace. One where specialists have been busted for trading ahead of orders from the public and countless specialists have and board members have been let go.

They get better:
". . .Whether they are a retail investor purchasing 100 shares or an institution trading one million shares, they have options that enable them to receive the best price from their trading venue."

ArcaNews view: If that's the case why have so many specialists been busted for giving themselves better prices?

Over the past 212 years, the New York Stock Exchange has stood as a great American institution by gaining the trust of millions of investors and the world's leading corporations; today, over 2,760 companies are listed on the NYSE and their market value exceeds $18 trillion. The NYSE has helped to both fuel the growth of U.S. enterprise and maintain the global pre-eminence of the U.S. capital markets. Our success has been won on the basis of our ability to provide the world's deepest pool of liquidity, the best price discovery, the highest certainty of order execution, the lowest overall cost of trading, and very importantly, the lowest volatility."

ArcaNews view: Gaining the trust of millions of investors? Paaa-lease! Again, Grasso's ridiculous pay structure, specialists breaking the law, and NYSE-listing of Enron surely underscore this trust.

Thain continues:
"In one key area of competition, speed, the New York Stock Exchange needs to improve in order to stay competitive. "

ArcaNews view: Speed an an open-outcry system is a paradox. Simple as that. A "hybrid system" is hogwash and merely a method of trying to preserve antiquated tradition.

Here Thain gets a bit protectionist:
"My concerns about the CLOB's impact extend beyond the New York Stock Exchange to the overall competitiveness of U.S. markets and how they serve investors. In an electronic-only environment, where exchanges must break up orders to attempt to chase displayed quotes from market-to-market, large orders of stock will be difficult to execute. Instead, these large orders may go elsewhere, to be traded in private markets or overseas."

ArcaNews view: If trading in private markets or overseas assures investors of the best price and execution, Thain's talking out of both sides of his mouth.

Tuesday, December 21, 2004

A Chill Pill For Daily AX Watchers -

If you've been watching AX's stock performance on a daily basis (or on an hour-by-hour basis) lately you might wonder what's been up with the light volume and drop in price. First, just a reminder: On 11/29/2004 AX set a 52-week high (intraday) of $22.90. It closed that day at $21.95. Since then the stock has fallen, but as of today's close it's fallen a total of $1.79.

On 12/06/2004 AX hit $19.51 intraday - so as of today's close it's up $0.65 (see historical price data here: To be sure, these short term fluctuations don't have much conviction.

Here's a great piece by Warren Buffet where he cites
Ben Graham ("In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine."):

The chart below may alleviate any concerns you may be having regarding "the voting machine". In the long run, ArcaEx tips the scales!

Trending: By Kensey (This is quoted from

"The price action of a stock is categorized as either trending (moving generally up or down) or range-bound (sideways). Trending stocks are going somewhere in a vertical direction, while range-bound stocks travel horizontally.

A trend exists when prices keep rising or falling over time. This is called directional price action. In an uptrend, each rally (upsurge) penetrates a higher price level than the prior rally, and each retracement (fall) stops above the level associated with the prior retracement. It's like a set of stairs at an angle."

Monday, December 20, 2004

Specialists' Revenues Plunge

Looks like NYSE specialists are aboard a sinking ship. They announced today that collectively they lost $12 million during the third quarter (read about it here:

And worse yet, nine-month cumulative profits during the period totaled $3 million (after taxes), down from $138 million for the industry during the year-ago period.

Sunday, December 19, 2004

Time for Change

NYSE's Thain Fears End of An Era

Last Thursday (12/16/2004) NYSE chief executive John Thain spoke to the press about his views on the revised Regulation NMS. Here is some of what Thain said (quoting Thain from DowJones Newswires):

[Background: One of the NYSE's big fears is that Regulation NMS will be the catalyst for eliminating its archaic open outcry, floor-based auction system. "CLOB" stands for Central Limit Order Book". In a CLOB marketplace
brokers "sweep" across all markets and prices to find the best price for a particular stock.]

Wondering how does Thain and the NYSE view innovation and efficiency? Here's a telling statement he made on 12/16/2004:

"In a CLOB environment, it would be very difficult for us to maintain the auction process. It really eliminates the ability to have an auction on the floor of the New York Stock Exchange in the first place. . .It forces everyone into a purely electronic model."

[Editorial comment:What is wrong with that if it means efficiency? Microwave popcorn pretty much replaced the old fashioned oil and popcorn machine method. Ink pens replaced feathers and ink, automobiles replaced horses (and made businesses that survived on cleaning up horse dung obsolete), on demand video has replaced the need for Blockbuster or Netflix, modern medicine has replaced the need for medicinal leeches, peer2peer networking has caused disintermediation in the multimedia industry. . .)
The nature of business and advancement of our society lays in our ability to use technology to create efficiencies].

When Thain was asked about the possibility of the NYSE acquiring Instinet, he skirted the question but did say
that the NYSE needs to focus on the market for Big Board-listed stocks. (Quoting from DowJones Newswire) "I don't think we need to look into other markets at the moment."

What exchange could possibly be taking share from the NYSE? You guessed it, ArcaEx - Just look at the gains in NYSE-listed market share ArcaEx has been enjoying over the last year and the last sequential quarters (click here to read Arca's November 2004 numbers:

Here's what the press release from AX says, "
Specifically, in NYSE-listed equity securities, ArcaEx's total trading market share was up both year-over-year and sequentially, growing from 1.1% in November 2003 to 2.4% in November 2004 and from 2.3% in October 2004." As for OTC share - It will be interesting what happens when Instinet either becomes part of ArcaEx or fades away. "

Saturday, December 18, 2004

LaBranche and Fidelity Latest to Have Wrist Slapped

Late Friday (12/17/2004), it was revealed that the NASD was looking into imposing (even more) disciplinary action against the LaBranche for violation of federal securities laws as well trading regulations (read about that here:

In other news the same day, Fidelity (one of the most vocal critics of Regulation NMS and a company that uses its deep pockets to lobby the politicians at the SEC) announced that 16 of its employees were being disciplined (read about that here: for illegal actions.
To be sure, the house that we call the US capital markets is in shambles and it is high time its structure get rebuilt.
Consider the steel industry for a moment. Through the decades the US government has had what are called "anti-dumping" regulations. When a country breaks these rules, ocassionally the US Government imposes tariffs. This is a form of an ex post facto penality - the same kind of retrospective penalities the NASD and SEC impose on rule breakers in the US capital marketplace. For many reasons, these tariffs actually damage the industry. You can read about that here:

This is essentially what is happening in the US capital markets. Punishments are being dolled out to those guilty of crimes, but these penalties have no real impact on the marketplace. Fines assessed to companies hardly make up for the illegal activities they've committed. It's like fining Barry Bonds for using steroids while he still is able to maintain the all-time record for home runs hit in a season (while on steroids). The damage is done and the penalties that are imposed are merely a method for the oversight bodies to tell the public that they've caught those guilty of breaking the rules. The same way a monetary fine to Barry Bonds is a drop in his bucket, fining Fidelity and LaBranche is in no way damaging to their stakeholders -- the fines are merely a niftly public relations ploy by the oversight bodies.

So, in the last two years we've seen fine after fine, firing after firing, and still more crimes being committed. The actual structure must change if there is ever going to be a fair marketplace. One more metaphor: When a house is infested with asbestos and is in shambles, it is usually most efficient and reasonable to raze the house and build a new one (read: re-build the structure).

To be sure, the house that we call the US capital markets is in shambles and it is high time its structure get rebuilt.

Thursday, December 16, 2004

Extra, Extra Read All About it! Here's the Revised Regulation NMS

Here's where one goes to voice their opinion about the revised Regulation NMS:

Please, send e-mail to the SEC so they know where we, the public, stand on these monumental changes to the capital market structure here in the US. Please read the post below which described AX's views on the proposals. In short, here's where AX stands:
(feel free to copy and paste the following and send to the SEC)

1) Expanding the trade-through rule to the OTC marketplace is bad - bad because it interferes with the speed of execution and undermines the advances that the OTC marketplace has made over the years in terms of speed and best-price execution.

2) The SEC needs to ENFORCE the existing trade-through rule for the NYSE. As it currently stands, the specialist is the only one that's guarenteed the best price -- not you and me (read: the public).

Wednesday, December 15, 2004

NY Post Report: Nasdaq in Talks to Buy ArcaEx

Today New York Post author, Paul Tharp reports that the Nasdaq, who recently filed a registration for an IPO, is in talks to acquire Archipelago. Here's the story:

Here's the excerpt: ". . .
Wall Street sources said the Nasdaq is in talks to acquire a competing all-electronic exchange, the Archipelago Exchange (ArcaEx) of Chicago, which had no comment on the reports. Acquiring Archipelago would give the Nasdaq broader market share and boost its value, sources said."

Tuesday, December 14, 2004

Financial Times Finally Runs Story Re: NMS -

At approximately 10:00 PM (EST) this evening, The Financial Times published this story regarding Regulation NMS titled, "SEC Change Would 'Threaten NYSE Traders'." You can read it here:

Since there's a chance that the link above may not work in subsequent days you can read the article below:

SEC change 'would threaten NYSE traders'
By David Wighton in New York
Published: December 15 2004 02:00 | Last updated: December 15 2004 02:00

The Securities and Exchange Commission is today expected to propose a change to US stock trading rules that experts believe would undermine the traditional floor-based auction system of the New York Stock Exchange.

The five commissioners of the chief US financial regulator are expected to vote to publish the proposal for public comment in the final step of the long consultation on so-called Regulation NMS.

The new proposal would ban a stock trade being done on one market at a worse price than that on offer anywhere in the displayed order book of another market. The SEC's original proposal, on which it sought public comment, limited such "price protection" to the best prices on offer at each market.

Supporters and opponents of the new proposal agree that it would threaten the floor-brokers on the NYSE and their practice of holding orders in reserve before exposing them to the auction. It is less clear if the reform would have a serious impact on the "specialists", who match buyers and sellers in NYSE-listed stocks.

Critics of the proposal - including the NYSE, Nasdaq and some leading brokers - are concerned that it could reduce competition between markets by making it less important which market an investor places an order on. There are also opponents within the SEC who are expected to argue for the original proposal to limit price protection to the "top of book".

Supporters of the new proposal argue it would be good for investors and the increasing use of sophisticated trading technology means it would be only a matter of time before it was implemented anyway.

The SEC first published proposals to reform stock trading rules, including the price protection provided by the "trade-through" rule, in February.

Some institutional investors had become increasingly frustrated that the trade-through rule was forcing them to use the NYSE, which usually displays the best price, instead of faster electronic markets.

Revised proposals appeared to attract widespread support with the exception of Fidelity, largest mutual fund manager.

However, some of the responses to the consultation suggested that price protection be extended to "depth of book".

Three weeks ago it emerged SEC officials were recommending just such a change and that the commissioners would be asked to vote on the revised plan without further consultation. After lobbying, the SEC agreed to propose another period of public comment.

SEC Discusses NMS Tomorrow - Here's How Arca Feels about Some of the Proposals

Judith Burns of Dow Jones Newswire published a story today at around noon (EST) which includes some choice quotes from various stakeholders. This article and some of the quotes contained in it serve as a good mixer for AX's CEO, Jerry Putnam remarks to the Committee on Banking, Housing, and Urban Affairs titled, "Regulation NMS and Developments in Market Structure." These were published on July 21, 2004, You can read them here:

The following is a quick review of NMS and Arca's stance on some of the rules contained within the proposed regulations.

Subject: ENFORCING the trade-through rule for the NYSE
Arca's View: Jerry Putnam says that (see the aforementioned remarks), " . . .the SEC must
monitor and enforce whatever trade-through rules are in place. Industry insiders have
known for years that the trade-through rule is the least enforced rule this side of the double
nickel speed limit on America’s highways. For example, despite the fact that there is a
trade-through rule for NYSE- listed securities, ArcaEx quotes are traded through on
average of over 2,000 times per day (ArcaEx runs software (aptly named 'whiner') that messages alerts when exchanges trade through an ArcaEx quote in violation of the ITS Plan. For the week of June 21st 2004, ArcaEx complained to otherexchanges 11,816 times about being traded-through for an average of 2,363 complaints per day

In fact, trade-through violations have actually risen most recently despite the glare of the regulator spotlight on the NYSE. On any given day, ArcaEx has a billion shares on or near the national best bid or offer. Yet, the NYSE sends only two million shares to ArcaEx over ITS when we have the best price. The existing trade-through rule protects the NYSE’s market share by requiring orders to be funneled to the specialists at the NYSE when they display the best price. This provides the specialist with a virtual put option on the order and ensures that they, the specialist, obtains the best price (Earlier this year, the NYSE’s five largest specialist firms agreed to pay a total of about $240 settle SEC allegations that they short changed customers by trading for their own accounts. See Traders Will Pay Fines Of $240 Million ”, Wall St. J., February 18, 2004. Some five months large specialist firms paid nearly a quarter of a billion dollars to settle SEC trading ahead allegations, NYSE’s other two much smaller specialist firms paid roughly $5 million to resolve similar SEC NYSE Small Specialists to Pay $5 Million in Cases on Trading”, Wall St. J., July 9, 2004). The customer, on the other hand, may or may not get the best price and may have even lost the opportunity, through this process, to receive any execution at all, not only at the NYSE but across all market centers.

Putnam continues, "Clearly, today’s trade-through rule is not effectively enforced, other than to ensure that the NYSE specialists receive the best price (It is difficult for a market participant to pursue enforcement of the current trade-through rule because it is an ITS rule and not an SEC rule. One has to go to the ITS Committee to complain before approaching the SEC. In addition, enforcement is after the fact so it is time -consuming and otherwise troublesome. Moreover, the existing rule is riddled with exceptions which has built up interpretive complexity over time). Implementing a clear-cut rule with no exceptions will be essential to ensure that the rule is adhered to and enforced. Reform
would enable investors to choose how they want their limit orders handled. They could
then send them to electronic markets that provide instantaneous display and automatic
executions against incoming orders. Or, investors could choose to send them to a manual
market if they want to expose the orders to specialist and floor broker handling".

Subject: Extending the trade-through rule to the OTC marketplace
Arca's View: (From Mr. Putnam's aforementioned comments) "Execution speeds in OTC stocks are generally sub-second and currently surpass quote update speeds. Accordingly, introducing a trade-through rule in OTC would result in holding up executions while awaiting dissemination of quote updates, or worse yet, in instigating increased cancellation of orders. From a practical perspective, in OTC stocks where speed and certainty of execution are critical, the customer sending the order in an environment with a trade-through rule is disadvantaged because not only will it take longer to execute the order, but he or she may receive a partial fill - or no fill at all. In other words, the OTC market is not broken so why fix it."

Nasdaq's View (from today's Dow Jones article): "Nasdaq officials disagree [that the trade-through rule should be expanded to the OTC marketplace]. 'Nasdaq really, really doesn't need that rule," said Adena Friedman, executive vice president for corporate strategy and market data at the Nasdaq Stock Market. She said trading through doesn't occur that often on Nasdaq and is more of a problem at the NYSE, where 'they trade through all day.'

There remains an issue regarding government intervention for setting market access fees. Arca is opposed to this.

Putnam says in the aforementioned remarks, "We are very concerned, however, about the role of government in regulating the amount of any fees. History has not been favorable to command economies, in which the government places its judgment above that of the free market. In essence, by setting maximum access fees, the SEC would engage in ratemaking, substituting its views for that of the markets."

Putnam continues, "Most ECNs were able to charge significant access fees only when participants were not technically able to avoid trading with them. Nasdaq—through SuperSOES and SuperMontage—did not provide members with the ability to avoid trading with auto-ex
ECNs, even when they charged exorbitant access fees. However, with Nasdaq’s selfimposed
cap on ECN access fees, such excessive fees are no longer a significant issue. Moreover, the problem will not recur so long as OTC market participants are provided with the ability to choose not to trade with a market center that charges unreasonable fees. By virtue of market competition, fees have dropped well in excess of 80% since 1997. Competitors that did not reduce fees as a result of market forces found their market share and profits eroded."

To be sure, tomorrow's SEC meeting stands to be historical. Lets just hope that the reforms are fair, simple, and foster innovation. For more on the ethical questions related to govenment intervention in a free market system check out this section of
Man, Economy, and State, with Power and Market, by Murray N. Rothbard.

Monday, December 13, 2004

WSJ article, SEC, and obsolescence of floor broker/specialists

On 12/09/2004, Wall Street Journal reporters Kate Kelly and Deborah Solomon published a story titled, "New SEC Rules Create Winners (and Losers)." A highlight of this article is the following:

"Some say the SEC plan could in effect eliminate the need for NYSE floor brokers and diminish the role of the specialists who oversee its stock auctions, because so much trading would be electronic. Many floor brokers and specialists have NYSE ownership stakes, so how they fare could influence the Big Board's opinion.

Moreover, floor brokers and specialists profit off market-moving bid-and-offer information they glean from their privileged posts, but the SEC proposal would pressure the NYSE to make more of such data public. Under the current system, markets only have to publicize their best prices. In the new system, they would publicize all bids and offers if they want other markets to send orders their way. Publicizing all bids and offers would allow institutional investors to fill huge orders quickly, scooping up, say, 100,000 shares of a company at $40 for 30,000 shares, $40.01 for 50,000 and $40.03 for 20,000.

Big Board executives have told the SEC they may sometimes opt out of the new system to preserve the NYSE's 212-year-old auction system, SEC officials say. That could be an empty threat, because doing so would let rivals ignore its bids and offers."

The authors also discuss the potential impact that Regulation NMS has on the Nasdaq, Arca, and Instinet. They say that since currently no "trade through" (read: shop for best price) rule exists for the Nasdaq, most of Nasdaq orders are filled within Nasdaq. The authors explain that often " "better prices are on rival electronic-trading sites, mostly ArcaEx and Instinet." (Note: interestingly enough when you read this article on the aforementioned quote contains a link to Instinet (INGP) stock information. No such link is available for their scribing of ArcaEx - an indication of just how unknown AX is on Wall Street (as of this writing).

Finally, another takeaway from this article is this concept, ". . .But there is a significant flipside: Nasdaq and other electronic markets stand to gain ground in the trading of NYSE and Amex stocks." ArcaEx has grown market share in both AMEX and NYSE sequentially (quarter/quarter) and year/year. Schmendricks like Lehman and Jeffries have demonstrated via recent comments and downgraded that they're focused on Nasdaq market share and are clearly not focused on where the puck is headed. Do a search of this site for "market share" to read about the potential growth for ArcaEx.

Saturday, December 11, 2004

AX's change in cash received from customers versus its change in revenue.

This explanation is courtesy of Investopedia.

Friday, December 10, 2004

The Chief of Thieves

Specialists Specializing in Crooked Practices

In light of
a specialist from Van der Moolen Specialists being barred from the industry earlier this week it seems like a good idea to briefly review how the NYSE has changed over the past 18 months. Read about the most recent barring here: Slowly, but surely, the Buttonwood Bourse (read: NYSE) is being shaken up and becoming less of a club and more of a fair market. Reg. NMS is a giant step in that direction! So here's the Cliffs Notes:

The relevance of this and the seven other specialist firms that have fired or suspended employees due to crooked practices (read: trading for their own account ahead of customers) against the backdrop of Reg. NMS is this:

If and when the new regulations are adapted, there will no longer be an opportunity for shady operators. One can only imagine how much illegal activity must've existed on the NYSE (and the AMEX and Philly, for that matter) in decades past. How many shady operators over the years have profited from illegal schemes that were never unearthed? It's simply a wonder that it took the SEC so long to clean things up!

It's doubtful that Goldman Sachs' specialist division, Spear Leads & Kellog just recently started to act illegally (six senior executives left that company earlier this year). Moreover, dozens of brokers, clerks and specialists have left the NYSE over the last year and a half due to layoffs, and regulatory investigations which led them to believe their game of fleecing the public for their own benefit was over. Fleet Specialist President Miles Gillespie pretty much led this mass exodus. Likewise, LaBranche, the biggest specialist firm at the NYSE fired at least two employees last month - and it's doubtful that they just recently began to operate illegally -- they just started to get caught

You can read about this mass exodus here:

Market Access Fees

Year/year growth in the Market Access Fees catagory is roughly 32% (source: from 2003 to 2004.

It's a shame that the analyst community has disregarded revenue streams other than transaction fees. Currently at approximately 11% of total revenue, it's a line to keep an eye on as it contributes to AX's overall revenues.

Thursday, December 09, 2004

The Evolution of Stock Exchange Structure

Founders of the NYSE sign an agreement to exclude other markets

"The longer you look back, the further you can look forward." --Winston Churchill

With 12/15/2004 quickly approaching and the potential for perhaps the most dramatic change to the US equity market system in generations becomes closer to reality, I thought it would be interesting to take brief look back to how the NYSE started in the first place. You can read a very brief history here:

Here's a quote from the aforementioned link. I
t's evident that having an exclusive club which alienates other markets is in the DNA of the New York Stock Exchange.

"1792, twenty-four of New York City's leading merchants met secretly at Corre's Hotel to discuss ways to bring order to the securities business and to wrest it from their competitors, the auctioneers. Two months later, on May 17, 1792, these merchants signed a document named the Buttonwood Agreement, named after their traditional meeting place, a buttonwood tree. The agreement called for the signers to trade securities only among themselves, to set trading fees, and not to participate in other auctions of securities. These twenty-four men had founded what was to become the New York Stock Exchange. The Exchange would later be located at 11 Wall Street." (Source:

The evolution of the equity market system didn't end with the specialist and open out-cry system. That was one step in an ongoing effort to create a state-of-the-art stock market structure. So called self-regulatory organizations (SROs like the NYSE) don't jive with an information-rich societal structure. In 2004 people have access to more information than ever before. It's only logical that our equity market system will work in such an environment. Keeping secrets (read: floor brokers and specialists knowing more than the public) simply does not fit today's environment. Indeed, history teaches us that stock market evolve.

After approximately 300 years of a floor-based, open-outcry system, The London Stock Exchange managed to break tradition in favor of a more state-of-the-art structure. You can read about their fascinating history here:

Regulation NMS and its Impact on Issuers

Yesterday, CFO Magazine published a story titled, "How SEC's Market Reform Affects CFOs." The article is chock-full of quotes from industry insiders and former SEC officials. You can read it here: Of particular interest is this insight from Michael Panzner, head of sales trading for Rabo Securities USA:

"But don't expect such market efficiency anytime soon. Panzner notes that while the rules' sweeping of the market sounds great in theory, an electronic linking of various markets is contingent on the participants agreeing and getting the technology in place first. 'Both, in my view, will take an extraordinary amount of time,' he says."

First, ArcaEx is well positioned for these potential reforms. Accordingly, their "property value" will increase as the laws of supply and demand take shape. The demand will be there, but the supply is anemic. A week from yesterday the SEC meets to discuss their latest proposal. It should be interesting to watch the popular media shift some attention to this major event. To be sure, when these changes are announced it will likely seem like it came out of nowhere. My hunch is that AX's volume might seem like it came out of nowhere as well!

Wednesday, December 08, 2004

November Numbers are in - Lehman's Ignorance Highlighted

On 12/3/2004 Lehman's lame analyst Roger Freeman downgraded AX (though he upped his price target 33% - from 18 to 24!) citing AX's 1.2% decline in Nasdaq market share from 10/2004 through 11/2004. We've already discussed his disregard for AX's 1.1% year/year gain in NYSE market share, but today's numbers regarding November's volume (see here indicate that Freeman missed another important factor - from 10/2004 through 11/2004 AX gained 1.1%. This indicates that AX's NYSE-listed share is on the rise and essentially compensates for any loss of Nasdaq market share during the same period.

Seems logical that Freeman/Lehman (read: Lame-men) would release comments regarding AX's increase in NYSE-volume since that's a pretty significant trend, and one that management has said is a priority for growth. To be sure, AX is executing on its goals, has strong diversification in terms of markets it is taking share from, and is incredibly well positioned for any Regulation NMS fallout.

Great article re: Reg NMS

This article is a great read: It covers the revisions of Reg. NMS and does a fairly good job explaining why creating a more open marketplace could potentially make floor brokers obsolete. To be sure, there are plenty of large institutions that employ floor brokers and they will fight this tooth-and-nail.

The article also explains that the leaks regarding NMS's revisions indicate the potential for the NYSE so-called hybrid system obsolete. Again, the question arises, will exchanges build or buy? If they choose the latter, what other system exists like ArcaEx that would make for an off-the-shelf compliant stock exchange system?

Tuesday, December 07, 2004

Float, Shares Out. and Clarification

: The original post which discusses Capital Atlantic's position has been edited for accuracy below. I apologize for any confusion. This post is designed to clarify some of my points from earlier.

Since I've ranted about the float and the percentage of shares owned by Capital Atlantic Partners I thought it'd be useful to link to a nice explanation regarding the distinction between total shares outstanding and the float. You can read that here:

EPS is calculated using total outstanding shares -- and that is probably the best number to use when referring to ownership percentages. According to Y! Finance, AX has 47.14 million shares outstanding (source:
. So, another way of looking at CA Partners' stake is roughly 25% of all outstanding shares -- again, a considerable position by any standard!

The float changes when restricted shares are sold in the open market. Let's assume, hypothetically, that CA Partners sells all 10,000,000 shares of AX. The float would increase to 21 million shares. In that scenario, CA Partners would've owned nearly 50% of the float. My point is: CA Partners has a sizeable position and if they are selling it represents a significant percentage of the float.

Here's another way to look at it:
Last quarter, AX reported diluting earnings of $0.21/share. Multiplying CA Partners' stake by that number (10,380,000 x $0.21) we get $2,179,800 worth of earnings for CA Partners. Considering that pre-tax income for the third quarter was $15.9 million -- 13.7% of that income is represented in CA Partners' stake.

An Update On Chamberlain's Ignorance

Last month I wrote about how Jeffries' analyst, Charlotte Chamberlain, is a great contrarian indicator. Today as I was writing about General Atlantic Partners and their rather significant holdings of AX it occurred to me that there is an example of how Jeffries doesn't get AX. If you harken back to last quarter's conference call (click here to listen to it: at approximately 51:32 minutes into the call, Chamberlain asks what the reason that AX's 25-day moving average of volume (the stock, AX's volume) is 141,000 shares.

First, how does a company's management know what the market is thinking? Second, it's clear that she doesn't realize that General Atlantic Partners owns 94 percent of the float. If they aren't trading, that only leaves about 620,000 shares to be traded. at 141,000 shares/day that's roughly 23% of the remaining float. By anyone's standards, that's a decent chunk of trading volume. Not to mention, the stock's up over 10% since her bonehead call on 11/11/2004.

It's also interesting that the release that was on Y! Finance re: her downgrade is mysteriously missing. Anything to avoid accountability!

CORRECTION: General Atlantic Partners Holds 25% of All Shares Outstanding


General Atlantic Partners holds 10,380,000 shares of AX (click here to view that position: That's a mighty significant position considering that AX has only 11,000,000 shares on the float and there's only 41.14 million shares outstanding. William Ford, a partner with General Atlantic Partners, has a seat on the Archipelago Board of Directors. He was interviewed by in 6/2000 - you can read that interview here: And to get a sense of how successful General Atlantic has been just consider that they turned a $14mm investment in e*trade into approximately $500mm in a few short years. They were one of e*trade's earliest believers.

A couple interesting take-aways from this interview is 1) His discussion of what a poor job Goldman Sachs does in the aftermarket for firms it underwrites, and 2) How General Atlantic Partners goes about realizing a profit by selling slowly so not to damage a company's stock. During the last couple of days we've seen Jeffries executing a significant portion of the volume

Yesterday, for example they crossed 17,000 shares in the third market when only around 20,000 shares had traded (in the morning, shortly after the open). And, last Friday, they handled over 120,000 shares of the volume. It seems possible that Jeffries was (and still may be) handling a big (read: whopping!) order from General Atlantic Partners. In fact in the aforementioned interview, Ford alludes to the incestuous nature of institutional investing.

Jeffries and General Atlantic Partners certainly are familiar with each other, and in fact, Jeffries' Vice Chairman, Robert Lessin sits on the board along with a General Atlantic Partners' partner, David Hodgson (
see info about that here [4th bullet point down]: It would not be surprising to see General Atlantic take some of their tremendous profit in AX off the table after more than doubling it in short order.

Friday, December 03, 2004

Lame Lehman

NOTE: I've corrected the link to institutional ownership. You can see that here.
Today Lehman Brothers' analyst, Roger Freeman said ArcaEx lost about 1.2 percent market share in November in Nasdaq-listed stocks so he cut his rating. First, it's interesting to point out that though Lehman Bros. was one of AX's underwriters (see:, they are not one of the 33 institutions that own shares of AX -- fortunately, NASDAQ publishes this information - you can see which institutions actually have a position in AX here: Today's big seller appears to be Goldman Sachs - and given that they own over 7,000,000 shares, were AX's lead underwriters, own 90,000 shares which were bought on the day AX went public (8/12/2004) at a price of $12.65/share, and purchased 88,000 shares on 8/17/2004 in a non-open-market transaction it is no surprise that they'd take some profits after AX's phenomenal performance over the last month.

Did Freeman consider ArcaEx's share gain in NYSE-listed names? Year/Year ArcaEx has gained 1.1 percent in market share for NYSE-listed volume and between 9/2004 and 10/2004 ArcaEx claimed .3 percent more market share for NYSE-listed names (source:

It's not everyday you hear about an analyst cutting a rating, but raising the same stock's price target. But Freeman did just that, he raised his price target to $24 from $18. It's worth noting Warren Buffet's axiom which goes, "In the short run, the market's a voting machine and sometimes people vote very unintelligently. In the long run, it's a weighing machine and the weight of business and how it does is what affects values over time." (source:

Thursday, December 02, 2004

Keeping an eye on market share

Arca has created an area on their website where anyone can type in a ticker and see what percentage of volume in that name ArcaEx handles. Follow this link to see:
Free Web Counters