Archipelago Goes West, Acquires Pacific Stock Exchange

January 11, 2005

The electronic revolution marches on...

Last week, Archipelago shelled out $50 million to buy the Pacific Stock Exchange and its electronic options trading platform.  Today, the company announced that insurance giant American International Group (AIG) has agreed to list its shares on the all-electronic ArchEx stock exchange. (AIG will retain its listing with the NYSE as well.)

The two events are not linked, at least not explicitly.  But taken together, they point to a huge trend in both the equity and options marketplace: The move away from the pits and towards the ruthless efficiency of computerized markets.

Archipelago Gets Its Foot in the Options Door

The deal with the Pacific Exchange did not come as a shock to many, as Archipelago and the Pacific Exchange have been in cahoots for some time: the Pacific Exchange is the regulator for Archipelago's ArchEx stock exchange, and Archipelago has owned part of the Pacific Exchange for years.

Moreover, the trend towards consolidation in the industry has been in place for some time: consider last year's purchase of Sungard's Brut ECN by Nasdaq, and the lingering rumors that Instinet is on the blocks. The decimalization of stock trading in 2000 significnalty cut into the profit margins of the equity exchanges, and they have been eyeing the lucrative and rapidly growing options markets ever since.

Add to this fact the continued transition of options trading onto electronic networks, and the boom in volume across all of the options exchanges, and it's surprisingly that more exchanges haven't linked up.

The Pacific Exchange is a small but significant player in the options marketplace, with approximately 9% of total volume, the bulk of which trades on its electronic platform. It was the first exchange to offer electronic trading, but its small size and lack of capital has made it difficult for the company to ramp up market share.  Archipelago, with its broader reach, should be able to help.

"We have seen the growing demand for electronic options marketplaces and are confident that our history of innovation, and the integration of options trading alongside the equities business, can bring new, differentiated opportunities to our clients," said Jerry Putnam, CEO of Archipelago, in a statement.

The potential benefits to customers are clear.  With options and equities trading side-by-side, traders should be able to rapidly execute complicated hedging strategies, without worrying about different execution standards, margin requirements or other discrepancies at different exchanges.

The deal is subject to SEC approval, and is expected to close in September.

AIG Listing

AIG is not the first company to establish a dual listing on Archipelago, but it is one of the most prominent, and the first to do so after the Pacific purchase raised the possibility of the dual options/equity listing potential. Although AIG didn't cite the options news as a reason behind the listing, it did make a big deal about the all-electronic trading capabilities.

"Aig firmly believes in the benefits of electronic trading and our dual listing on ArcaEx is proof of our dedication to creating and supporting the best trading environments for our investors," AIG chairman and CEO Maurice "Hank" Greenberg, said in a statement

Archipelago Names Former Fidelity Exec to Oversea PSE Integration

Archipelago has appointed a former senior manager from Fidelity to oversea the integration of the Pacific Stock Exchange.  Matthew Geiber, who had served as COO of Fidelity Capital Markets, had also served as a governor of the Pacific exchange. He will be responsible for developing the unified company's options business.

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