Taking Aim At The Big Board

The CEO of upstart exchange Archipelago is going after his biggest rivals

The son of a career army officer, Gerald D. Putnam knows his way around weapons. He learned to handle a rifle in his family's homemade basement shooting gallery in West Philadelphia. Nowadays, he uses bows and arrows to hunt deer in Wisconsin. But as the chief executive of Archipelago Holdings Inc. (AX ), which operates the upstart ArcaEx stock exchange, Putnam mostly targets rival electronic markets such as NASDAQ and Instinet Group Inc.'s (INGP ) INET. And now he's chasing even bigger game. Says Putnam: "We've got the New York Stock Exchange to work on."

Should his competitors worry? Given Putnam's record, they would be foolish not to. In less than two years, ArcaEx has grabbed a fifth of the volume in NASDAQ-listed stocks. Already, Archipelago's market cap, at $764 million, is more than NASDAQ's $515 million. Also, ArcaEx' powerful computers now handle nearly a third of the volume in exchange-traded funds listed on the American Stock Exchange. Putnam is "a true visionary," says Alfred Eskandar, corporate strategy director for trading network Liquidnet Inc.

The trick for Putnam, though, is how to keep Archipelago growing. After soaring last year, ArcaEx' share of NASDAQ-listed trading has plateaued as NASDAQ and INET keep their traders loyal with sharp cuts in fees. Putnam, 46, has refused to follow, arguing that his system's cutting-edge technology for executing trades is worth his higher fees. So he's mounting a three-pronged strategy: shop for deals that will bolster ArcaEx's volumes, persuade companies listed on the NYSE or NASDAQ to add dual listings on his exchange, and expand into equity options trading or other financial instruments.

Putnam charges into this battle flush with cash. He has $173 million on hand, including $58 million raised in Archipelago's initial public offering in August, and he's generating more every day. Merrill Lynch & Co. (MER ) analyst Colin Clark expects Archipelago to earn some $52.3 million this year on $538.2 million in revenue. What's more, the company's stock, up $5 from its IPO price, to $16.50 a share, gives him a handy currency.

The most likely targets are NASDAQ and Instinet, and Putnam hints at some sort of deal with one of them, though he won't say more. NASDAQ isn't keen on selling, but that doesn't rule out an alliance. Reuters Group PLC (RTRSY ) has signaled it would like to sell its 63% stake in Instinet, but such a deal would be pricey. The outfit, now valued at $1.6 billion, operates an institutional brokerage operation as well as an electronic marketplace. Regulators would also need to sign off on a deal that shrinks three markets to two, and could hear complaints from the odd one out.

Putnam might have more to gain by training his sights on the NYSE, especially since Arca handles less than 2% of the volume in NYSE-listed stocks now. This explains all the commercials for ArcaEx popping up on TV during the baseball playoffs. It's spending $20 million on marketing this year to build name recognition and get executives to list their shares on ArcaEx, too. It already has about 230 dual listings -- including IBM (IBM ), Wal-Mart (WMT ), Sears (S ), Charles Schwab (SCH ), and AT&T (T ) -- the result of its alliance with the Pacific Exchange in 2000. Its campaign will get a big boost if regulators make changes they are mulling that could favor electronic trading at the expense of New York's floor-based system. "The NYSE market is the wide-open field right now," says Robert M. Hegarty, a vice-president at the TowerGroup research firm.

Give Putnam points for chutzpah. An ex-stockbroker, he got the idea for ArcaEx in 1996 as the Securities & Exchange Commission was drawing up rules aimed at encouraging NASDAQ and new electronic networks to display cusotmers' stock orders. After NASDAQ officials brushed him off -- once telling him, he says, to "write his congressman" if he wanted changes in the markets -- he blazed his own path. "He saw an opportunity and he delivered on it," says analyst Clark.


To develop the technology, Putnam teamed up with a couple of Chicago software experts who had devised a stock-quoting system. Then he persuaded deep-pocketed investors, including Goldman, Sachs & Co. (GS ) and J.P. Morgan Chase & Co. (JPM ), as well as the likes of E*Trade Financial Corp., to back him. "I can't imagine how often he was told this is a stupid idea," says William E. Ford, a general partner at his biggest backer, General Atlantic Partners LLC, a Connecticut private-equity firm with a 22% stake.

Coming out on top has long been the Philadelphia native's goal. As a high school student in the 1970s, he threw himself into rowing for a private club team. Putnam, who sports the burly shoulders of a rower, led four-man sculling teams to world championship matches in his junior and senior years, sticking with the sport until his junior year at the University of Pennsylvania. He was a "driven individual," though "mischievous," and rowing focused him and taught him teamwork, says Brother Richard Kestler, Putnam's principal at West Catholic High School. Kestler recalls Putnam as gifted in business classes but less stellar in Shakespeare.

After college, Putnam picked up a few bruises as he bumped around Wall Street, working for a half-dozen trading firms and getting fired by two of them. He says Oppenheimer & Co. (OPY ) canned him in the mid-1980s because he wasn't producing enough business to suit his bosses. And in 1992, he says, he was on the street again after he and his superiors at Prudential Financial Inc. (PRU ) disagreed on whether he was authorized to execute a big futures trade that he had made for a customer. That's when Putnam decided he had to go into business for himself. So he set up a firm serving day traders called Terra Nova Trading LLC. "I was pretty angry about [getting fired]," he admits. "I'd much rather be in control."


While current and former associates call Putnam a fair-minded manager and team player, he has rubbed some the wrong way. Two of his former partners have filed separate suits against Putnam, claiming he froze them out of Archipelago. One, Chicago trader and financial author Lewis J. Borsellino, lambastes Putnam as a "car salesman," although he acknowledges that he's "very intelligent and very shrewd." Putnam is battling the suits and his attorney, Lori E. Iwan, says that she's confident "the truth will prevail." The NASD, the securities industry's regulatory organization, once fined Putnam $10,000 after he consented -- without admitting or denying blame -- to a finding that he failed to supervise staffers at his firm in 1998 who posted "exaggerated" claims about securities on a Web site that was used by day traders.

Putnam relishes his renegade role. He could retire and hunt all the deer he wanted by selling Archipelago today. The 1.2 million shares he owns are worth $19.8 million, not counting options. But with the industry reshaping itself as electronic trading booms, he likes being at the center of the action. "He's a young, passionate guy," says Celent Communications analyst Jodi Burns. "He's in this fight to stay." Indeed, Putnam promises, "we're going to win." He's hardly humble, but his targets are hardly small, either.

By Joseph Weber in Chicago

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