Archipelago Trading System Seeks to Challenge NYSE

The battle of the stock markets took a new turn on Tuesday as Archipelago, a 2-year-old electronic trading network, said it would apply to the Securities and Exchange Commission to become a stock exchange--and will go public next year.

Archipelago also said Reuters Group’s Instinet--the leading electronic trading network--bought a 16.4% stake in the rival network.

The developments are the latest in a whirlwind of activity that is reshaping the trading landscape.

Just last week, the New York Stock Exchange said it will probably go public by November, in part to raise capital that could be used to develop its own electronic network. And the Nasdaq Stock Market’s parent will vote Thursday on whether to go public, for similar reasons.

Networks like Archipelago and Instinet have grabbed nearly a third of the trading of Nasdaq stocks in recent years by offering high-speed, low-cost systems that simply match buyers and sellers of stocks, eliminating the role of dealers and keeping investors’ identities anonymous. These electronic communications networks, or ECNs, have become a favorite of fast-paced day traders, for example.

Now Archipelago and others are setting their sights on NYSE-traded stocks. The conversion to a stock exchange would allow Archipelago to trade NYSE-listed shares as well as Nasdaq issues. It would pit Archipelago directly against both markets.

“We think Archipelago has a good shot at becoming a very powerful for-profit exchange in this country,” said Instinet Chief Executive Doug Atkin.

The networks typically charge investors a fraction of what institutional brokers demand for trades. Analysts say individual investors have benefited as ECNs help push trading costs lower in general.

The linkup between Archipelago and Instinet also follows last week’s news that Charles Schwab, the nation’s No. 1 online broker, and Fidelity Investments, the leading mutual fund company, will create a network of their own.

It isn’t clear how many of these networks will ultimately survive--they’ll live or die based on the volume of trading they attract--but Archipelago has some big-name backers, including E-Trade Group, Goldman Sachs, J.P Morgan and American Century.

The Island ECN, owned by Datek Online Holdings, has such partners as brokerage TD Waterhouse Group and France’s Groupe Arnault.