Tuesday, November 30, 2004

SEC Publishes Statement Regarding Regulation NMS Revisions

This afternoon the SEC published this official statement:
The proposed changes could be more extensive than what was originally published (see the original proposal here:

Dow Jones Newswires interviewed SEC market regulation division director Annette Nazareth this afternoon. (You can read portions of that interview here: . She says that the plan is for the SEC to meet on 12/15/04 to consider Reg. NMS and then they'll post the revised plan on their website. Once posted, she says the SEC will wait 30 days for public comments. She said that if the revised plan is accepted changes would take effect in early 2006.

Griswold Fears Obsolescence

Yesterday, the Dallas Morning News ran a story that does a good job explaining why the traditional US stock exchanges are shiverring in their boots. To save you the trouble of registering, I've posted the article at the end of this entry. You can see the original story here: (it's free, but it requires you to register).

Robert McCooey Jr., chief executive officer of the Griswold Co. and an NYSE broker is quoted and appears to be kicking and screaming. Here's one of his whines, "If all the orders are displayed all the time in one system, that's it. There is no ability to compete and no reason for an exchange."

ArcaEx is incredibly well positioned for any such rule change. Wayne Gretzky attributes much his success to "playing where the puck is going. . .not where the puck is." We all know where the rules are headed, and it is clear that there is no other system as well positioned as AX for where the "puck" is headed.


SEC's trade proposal irks some in industry

Plan would expand 1975 rule that routes offers based on price

11:04 PM CST on Monday, November 29, 2004

By BILL DEENER / The Dallas Morning News

The Securities and Exchange Commission may soon unveil a new version of a proposal that, if adopted, would radically change the way stocks are traded.

The proposal, which staffers may present to the five SEC commissioners Dec. 15, would expand the so-called "trade-through" rule. The New York Stock Exchange adopted the trade-through rule in 1975 to create an orderly market structure out of a fragmented system.

The old rule requires that buy and sell orders for NYSE-listed stocks be routed to the market offering the best price. Buyers want the lowest price, and sellers want the highest price. Shares of companies listed on the NYSE trade on five regional exchanges, the Nasdaq stock market and the quasi-exchanges called Electronic Communications Networks, or ECNs. The Nasdaq has no trade-through rule.

The latest version of the proposed "Regulation National Market System" would expand the trade-through rule to the Nasdaq and all other markets, according to those familiar with the proposal. It also would require these markets to have better electronic links so that investors would be assured of getting the best prices.

Revealing all orders

Additionally, it would require brokers to electronically disclose all buy and sell orders. Currently, they must reveal only their best buy and sell orders. This provision has aggravated some market participants, because they say it was not included in the original proposal and will be costly to implement.

"It seems like the SEC sneaked this in at the last minute," said Robert McCooey Jr., chief executive officer of the Griswold Co. and an NYSE broker. "If the SEC wanted to do this, it should have disclosed this months ago."

SEC spokesman John Heine would not comment on the issue.

Under current rules, a New York Stock Exchange broker might post his best buy order for, say, 10,000 shares of Cisco Systems stock at $20. The broker might also have several more buy orders at a slightly lower price, say, $19.90, but under the current rules, the broker doesn't have to publish the entire list of bids and offers.

Mr. McCooey said having to reveal his "entire book" could unnecessarily move the stock price against him and his client.

"If you display a large order in a thinly traded stock, you will spook the market," he said. "That will disadvantage our customers."

Need for exchanges?

Mr. McCooey even went so far as to say that if the SEC adopts this portion of the rule, there will be no reason for the exchanges to exist.

"If all the orders are displayed all the time in one system, that's it. There is no ability to compete and no reason for an exchange."

Second, he said, it will be expensive for the exchanges, the ECNs and other market participants to handle the additional data that this part of the rule would require.

"It's one thing to post the best bid and ask prices, but you are talking about an exponential increase in data when you are posting all the orders from all the participants," said an exchange official who asked not to be identified.

Most market experts believe the SEC will extend the trade-through rule to the Nasdaq and other electronic markets. However, it might allow some market participants to opt out of the trade-through rule if they choose.

Fidelity, the giant mutual fund company, has openly criticized the rule because sometimes speed of execution is more important than the best price. Say, Fidelity wants to buy 100,000 shares of a stock, and the best selling price is on the NYSE, where someone is willing to sell 200 shares at $10 a share.

But let's say one of the regional exchanges has a sell order for 100,000 shares at $10.25. Under the current rule, Fidelity's order first must be routed to the NYSE where the 200-share order would be executed before the remainder of the order moves on to the ECN.

Small investors

No one is sure exactly what the final version of Regulation NMS will look like. But clearly the goal of regulators is to have more disclosure and better pricing.

Kurt Stocker, chairman of the NYSE's Individual Investors Advisory Committee, an advocacy group for individual investors, said he supports any changes that help investors get better pricing when they buy shares. He said he doesn't fully understand all the versions of Regulation NMS, but he thinks the SEC is on the right track.

"I think the SEC's thinking is very clear," he said. "They want investors to get the best price. You just can't take that away from small investors."

Monday, November 29, 2004

Traditional Players Getting Nervous

Today's Financial Times ran this story: regarding the SEC's potentially changing some of what was originally published in their Regulation NMS proposal. Here's a blurb from that story:
The change, which was first reported in the Wall Street Journal, has caused serious concern at the NYSE and at Nasdaq, though neither has yet made any public comment.

According to Bear Stearns, it would appear to require "a significant change" to the NYSE's hybrid plan. "This redesign could delay the roll-out of the hybrid market." Bear Stearns has expressed concern that the change could also increase market fragmentation and reduce the incentive for markets to innovate and stimulate liquidity."

Sunday, November 28, 2004

Eye on Growing NYSE-Listed Share

The last several posts here discuss Arca's strong management team as well as ArcaEx's drive to gain market share. This posting ties these subjects together.

In March 2004, Arca's stable of all-star jockeys was bolstered with the addition of former New York Stock Exchange (NYSE) Managing Director David Dioli to the position of West Coast Director of Listings Sales. Click the here to read all about it. And for more on taking share from the NYSE click here (it's a BusinessWeek article from 11/8/2004).

Saturday, November 27, 2004

"I know I can, I know I can. . ."

Marathon for Market Share

As of 5/2003, (source: Instinet had 30 percent of the share volume in Nasdaq stocks, and 4.5 percent in U.S. exchange-listed stocks. If AX and INGP became one company we're looking at accretive market share.
If AX and INGP join forces, ArcaEx would handle over 50% of NASDAQ volume!
Here's what I'm talking about: As of 10/2004 Arca had 2.3%-share of NYSE-listed volume, 27.0%-share for AMEX-listed volume, and 25.1%-share of NASDAQ-listed volume (source: . Accordingly, if AX and INGP join forces, ArcaEx would handle over 50% of NASDAQ-stock volume! To be sure, AX would grow its US-exchange-listed volume, as well.

Here's an article from 2002 that discusses Arca's acquisitions of GlobeNet and Redibook ECN: To me, this indicates Arca's willingness to buy instead of build. If you read the article from Fast Company (see below for details or just click this link to read) you'll see that Putnam is believer in grabbing market share.

The article addresses grabbing share - here's a snipet:
"As [Putnam] watched ArcaEx take its first tentative steps, Putnam says that it felt a little
anticlimactic. For a moment, he thought about everything that Archipelago had accomplished
since 1996: It had built the exchange. It had the jump on technology. And in those server farms, it
had enormous bandwidth. But in a sense, it had taken six years just to get to the starting line of
what's shaping up to be a marathon race for market share".

Friday, November 26, 2004

Re-inventing Wall Street

Below is a link to a great article from Fast Company (6/2002) about Jerry Putnam's vision and Archipelago.

In this insightful piece, Putnam's called the "face of Wall Street's future" and his stable of all-star jockeys is referred to as, "black belts in the complex, arcane world of markets software."

It's truly a great read! Click here for the article:

Great Jockeys and a Champion Horse

The same way that a horse can't win a race without a good jockey, a company can't achieve its potential without excellent leadership, management, and governance. Here's a quick overview of Arca's jockeys - If you ask me, they're a team of brilliant trailblazers!

Jerry Putnam, Arca's CEO, was named one of Time Magazine's Outstanding Innovators in 2000.

Mike Cormack, Arca's President, participated as a member of the NASDAQ Quality of Markets Committee, a group that helps to shape NASDAQ policy

Nelson Chai, Arca's CFO, earned his bachelors degree from Penn and his MBA from Harvard.

Arca's presentation at the Merrill Lynch Conf. 11/16/2004

Click the link below to hear Archipelago's presentation at the
Merrill Lynch Banking & Financial Services Conference: (keep in mind Merrill downgraded AX on 10/29/04 when the price was about $17.50/share)

Wednesday, November 24, 2004

AX and shades of CME

The Chicago Mercantile (NYSE: CME) had an IPO in December of 2002. They debuted at around $42/share and had trading volume very similiar to that of AX (

Today, nearly two years later, their price is roughly $200/share and their volume averages about 165,000 shares/day.

Here are some other choice comparisons: (there are, of course, PLENTY of differences)
Price/Sales ratio - For a quick take on the significance of this ratio click here:
AX: 1.64
CME: 10.11
This metric shows how much an investor pays for a dollar of revenue. A ratio 0f 1.0 means an investor pays $1.00 for a $1.00 of sales revenue.

Float - (Click for a definition)

AX: 11 million shares
CME: 31.7 million shares
Worth noting: The larger the float, the more diluted the EPS becomes.

Year/Year Revenue Growth - This one's pretty self-explanatory:
AX: 28.20%
CME: 16.10%

Marketwatch/Dow Jones Sleep In -

On 11/23/2004 (yesteday), AX announced at around 1:45 PM EST that they'd be opening earlier thereby extending their trading hours by 4 hours or 33 percent. This is great as it demonstrates Arca's scalability, flexibility, and commitment to providing a market rich with liquidity.

It's sorta funny that only today did CBSmarketwatch/Dow Jones report this story:

Tuesday, November 23, 2004

NYSE's Pain = ARCA's Gain

Here's the latest with the NYSE:
Worst trading volume they've seen in three years! Mind you, three years ago trading was anemic for some serious geo-political (and other) reasons.

It's 4 AM, do you know where your trade's at?
What a delight to hear that the NYSE is hurting the same day that AX announces that it will flex its economies by extending trading hours (each of these stories were released today).

Information about Arca's Stock (AMEX: AX)

This link has info regarding the lockup period:
And even more info:

Click here for ratios, institutional ownsership, and other info:

Monday, November 22, 2004

Overview: The World of ArcaEx

I've posted a 10-slide overview of the new market model and Archipelago's opportunity. Please send feedback to or post on this blog.

History: Technology Transforming the Stock Market

Traditional Market Model

Evolution of ArcaExchange

Shortcomings of Traditional Market Model

Benefits of a Digital Stock Market Model

Benefits: Business/Individuals

Potential Pitfalls


Click below to see ArcaEx in Action
For those who haven't seen the Arca Exchange in action follow this link. Then click on the "Java Version" option. Wait a second for it to load, then enter a ticker symbol in the box. Trading hours are from 8-8 EST. UPDATE: ArcaEx Flexes Economies-of-Scale - New opening time 4 AM (see the story released 11/23/04 here:

Friday, November 19, 2004

Jefferies as Contrarian Indicator -

Lady Chamberlain - Jeffries' Clown Analyst
Last week Jefferies downgraded AX. Here's why that's great news for the stock. Check out the analyst's track record covering growth-oriented, innovative financial services firms here:
In this age of information, analysts can not hide quite as easily as in yester-year.
Why are companies held accountable for their guidance and actual outcome accuracy, but analysts that steer the perception of institutional money managers (i.e, portfolio managers at mutual funds and hedge funds) have no penalty for being WAY wrong?

When BAXter International's management team couldn't get their forecasting right, the Board got rid of the top brass and the stock was hit. When an ANALyst screws up their forecasting and the stock takes a hit due to their poor forecast, there's little if any repricution for the bonehead bean counter.

In this age of information, analysts can not hide quite as easily as in yester-year. Looking at Lady Chamberlain, it seems like she's from an era of no accountability. It's a different world now and hopefully one of these days she (and others that are consistantly way off) will be held accountable for their knucklehead calls.

Thursday, November 18, 2004

Academic Explanation of Why the ArcaEx Model is Solid
Some may consider this over-the-top, but it provides a great explanation of how trades get done electronically. Some academics in New York collaborated on this (from Cornell and NYU).

Instinet and Potential Buyers -

Today's speculatory news was chock-full of banter about Instinet's hiring UBS to find a buyer for the company. While most guessed that logical buyers would include AX, NITE, and/or NASDAQ, there's value to looking at history.

In June of 2003, The Philadelphia Exchange was interested in joining the Pacific Exchange/AX. Jerry Putnam and the other geniuses that run the ARCA show said thanks but no thanks. Here's a snippet of that story:
And, in 2002, the Cincinnatti Exchange really started to show progress in taking market share from NASDAQ. Today's speculatory news didn't mention the CINCY Exchange as a potential buyer of INGP, but that might make some sense. Here's that story from 2002:

Either way, INGP's going away should dramatically help AX as it consolidates this industry. Naturally, this should increase ARCA volume. Not to mention, while INGP is on the auction block, we may see volume move from INGP to ARCAEX.

The Best ARCA Overview Out There!
This PowerPoint presentation does a good job expressing why AX is amazing and why it has such incredible potential!

Wednesday, November 17, 2004

Disintermediation of Burses with Automation Creates Better Marketplace
The NYSE really thinks it has a chance of competing with other electronic markets (see the 2nd to last paragraph on the 2nd page of this story). It would be quite interesting to take a look at the gross profit margins of the NYSE compared to ARCA. The overhead for the NYSE has got to be pretty darn high -- especially compared to the overhead for ARCA. Specifically, I am referring to the fixed costs of these two exchanges.

From my perch, it appears as though the NYSE, steeped in tradition and full of executives that don't have the first clue about how things work in a networked, digital world, is desperately trying to cling to their traditional methods while trying to pacify the public by introducing an element of automation.

To use a steel analogy: Nucor (NYSE: NUE) revolutionized the steelmaking industry. They did this by replacing real-estate and labor intensive, sprawling steel mills. Traditionally, these mills had very high direct costs. NUE came along and introduced the "mini-mill". (read about this here:

By replacing unions with machines, and brownfields with squeeky-clean warehouses, NUE was able to transform the industry and move from a relatively small player in the Steel Industry to a Steel Industry giant. Innovation that creates efficiencies win in the long run. The traditionalists (read: stakeholders with the most to lose) stall and try to come up with compramise, but again, look at the Steel Industry.


Please share any comments you have.

Thursday, November 11, 2004

The pioneers at ARCA (AMEX: AX) are trailblazers! I first heard about these guys about 7-8 yrs. ago when Goldman and some others invested heavily in the company. We've come along way since then! The latest earnings release reveals that market share in growing significantly.

With only 1.5% share of NYSE we have plenty of room to grow. Reg NMS, SRO reform, and elliot spitzer are all in our corner. And of course, the NYSE CEO is a former Goldman fella. That helps aid digestion if AX were to be acquired.

Please post your thoughts as we build out this blog.
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