Firms Claim Electronic Trading Stakes
June 21, 1999
Electronic Communications Networks (ECNs) are commanding considerable attention and producing substantial costs for major financial services players. American Century Investments along with J.P. Morgan, which owns a 45 percent stake in American Century of Kansas City, Mo., is the latest in a series of industry firms to announce they have bought stakes in electronic trading firms.
J.P. Morgan purchased a 15 percent direct interest in Archipelago Holdings of Chicago, an alternative electronic trading platform that allows for the trading of NASDAQ stocks. J.P. Morgan purchased an additional indirect five percent share on behalf of American Century. Terms of the deal were not disclosed.
Archipelago is one of the four original ECNs approved by the SEC in January 1997. According to NASDAQ trade information, Archipelago executed about 216 million shares last year. E*TRADE Group and Goldman Sachs are also investors in Archipelago.
The Archipelago deal is one in a series of strategic investments American Century has made over the past couple of years, said Chris Doyle, a spokesperson for American Century. Eighteen months ago, American Century bought a minority stake in Optimark, another ECN. This past May, American Century and J.P. Morgan, as part of a consortium of corporate investors, purchased a collective 55 percent majority stake in Tradepoint, the London-based ECN. Other members of that consortium include Instinet, a wholly-owned subsidiary of Reuters Group PLC, Morgan Stanley Dean Witter & Co. of New York, and Archipelago.
"We want to sponsor, encourage and nurture some of the newer technologies coming along that we think will ultimately benefit shareholders by lowering costs," said Doyle.
ECNs match buyers and sellers of stocks, electronically, without going through brokers and promise institutional investors, and in some cases retail investors, best trade execution. Institutional traders, such as fund advisory firms or pension fund managers who trade blocks of securities in and out of portfolios, can benefit from trading electronically versus the more traditional process of executing buy and sell orders through securities dealers, ECN owners say. ECNs generally save time and money by routing trades directly to exchanges. Cost savings can then be passed on to fund shareholders, say ECN owners.
In addition, ECNs guarantee trading anonymity of buyers and sellers. That is important because often fund managers want to execute trades without tipping their hands to other market participants, said fund equity traders.
Moreover, ECN providers claim ECNs eliminate any possible conflict of interest issue because they offer neither opinions on various stocks nor have a vested interest in peddling any particular stock.
Several firms are hoping to capture pieces of the ECN trading pie. In May, Toronto-Dominion's Waterhouse Investor Services invested $25 million in The Island ECN of New York. Earlier this month, Vulcan Ventures, of Bellevue, Wash., the venture capital firm of Microsoft co-founder Paul Allen invested an equal amount. And two weeks ago, Merrill Lynch and Goldman Sachs, both of New York, announced plans to develop an ECN with Madoff Investment Securities of New York to be called Primex Trading.
American Century is not only a believer in the power of electronic trading, it is also a major user of the technology. According to Doyle, American Century now executes close to one-third of its equity trades through electronic trading networks. American Century sponsors 70 no-load funds and has $85 billion under management.
Other astute mutual fund firms have clearly seen the potential rewards of electronic trading. Eelectronic trading now accounts for up to 10 percent of fund and separate account trades of Federated Investors of Pittsburgh, said Dave Briggs, senior vice president and head of equity and high yield trading at Federated. That is double the volume of electronically-executed trades just five years ago, said Briggs. And he expects the percentage of electronic trades to double again within the next five years.
"Right now, the field is slanted more toward the retail investor who can execute trades for $8," he said. He said he sees no reason why institutional investors should not be able to follow suit. Federated currently executes trades via Instinet and Optimark, and is testing Bloomberg's Tradebook ECN. Briggs estimates that electronically-executed trades save the firm between 25 and 40 basis points per trade. But Briggs said it can be difficult to find enough investors to execute very large blocks of trades. As a result, Federated has to break down large trades into smaller portions, creating more work for traders.
Franklin Resources of San Mateo, Calif., parent of the Franklin Templeton Funds, is also a heavy user of ECNs, making up to 15 percent of its trades through ECNs now.
"We don't feel we need to use ECNs, but they give us more arrows in our quiver," said Dave Capurro, senior vice president and manager of the trading desk at Franklin. "Our main motivation is to get best execution for our mutual fund clients." However, Capurro said that for a load fund group, removing the broker/dealer element from a portion of the firm's trading can be difficult.
"We've always viewed out relationships with broker/dealers as really strong," he said. "We're not combative. We're not trying to move trades away from the exchanges or broker/dealers," said Capurro. "But potentially it can hurt the relationship."