Pacific Exchange to Join ECN; Floors to Close

The last physical stock exchange in Los Angeles is closer to shuttering its floor, as the Pacific Exchange said Tuesday it will form a new all-electronic market with the Archipelago trading network.

The Pacific, owned by its 552 members, operates options and stock trading facilities in San Francisco and downtown Los Angeles. But the 118-year-old market has been struggling to compete as all-electronic networks have surged in importance in recent years, and as the New York Stock Exchange and Nasdaq have ramped up competition for investors’ trades.

In October the Pacific’s members approved a plan to convert their money-losing stock-trading floors into a for-profit subsidiary, hoping to make the exchange a more desirable merger partner.

The Pacific’s executives said in October they expected the stock trading floors to close eventually.

The deal with Archipelago, one of several electronic communications networks, or ECNs, will allow the Pacific to become a virtual exchange, with buy and sell orders automatically matched by computer. The Pacific’s human “specialist” traders will be able to interact with orders but not “work” them, as occurs now, a Pacific executive said.

Those traders may simply be based out of their firms’ own offices rather than in one place, but that is yet to be determined.

The Pacific will receive a 10% stake in Archipelago, which plans an initial stock sale later this year.

The new exchange will trade New York Stock Exchange and Nasdaq shares. Most ECNs trade only Nasdaq shares.

“It certainly improves the clout of Archipelago,” said Richard McSherry, chairman of Elkins/McSherry, a New York trading consulting company.

Archipelago hopes to have the new network up and running by the end of the year, pending approval by the Securities and Exchange Commission. With the agreement, Archipelago will no longer need to proceed with plans to set up its own exchange. Being classified as a stock exchange is also advantageous because it allows the company to regulate itself, as the NYSE currently does.

Pacific officials will regulate the new market, while Archipelago will run the business, Pacific Exchange Chief Executive Philip DeFeo said.

The Pacific’s options market, the nation’s third-largest, won’t be affected by the transaction.