Archipelago

What Is Archipelago?

Archipelago was an electronic communications network (ECN) that merged with the New York Stock Exchange (NYSE) in 2006 to become the NYSE Arca Exchange. ECNs allow for automated trading, passive order matching, after-hours trading, and instantaneous order execution.

Archipelago, created in 1996, was one of the first ECNs and a precursor to the Archipelago Exchange (ArcaEx) that was created in 2001 to facilitate electronic stock trading for the major U.S. stock exchanges. Shortly after the merger with Archipelago, the NYSE became a publicly traded company with both new electronic and traditional floor-trading capabilities.

Understanding Archipelago

The electronic NYSE Arca exchange allows stock and options trading and offers one of the largest ECNs in the world. The NYSE Arca exchange is owned by NYSE Euronext and is headquartered in Chicago. 

An electronic communication network (ECN) is a computerized system that automatically matches buy and sell orders for securities in the market. It connects major brokerages and individual traders so they can trade directly between themselves without going through a middleman and make it possible for investors in different geographic locations to quickly and easily trade with each other. The U.S. Securities and Exchange Commission (SEC) requires ECNs to register as broker-dealers.

Archipelago was one of the first ECNs to be approved by the Securities and Exchange Commission (SEC) to open a national stock exchange. In its early stages the company — along with its primary competitors in the ECN space, Instinet and Island — displayed share price changes, the size of the bid and the ask, and provided instantaneous trade executions.

Archipelago and Traditional Exchange Partnerships

In March 2000, Archipelago partnered with the Pacific Exchange (PCX) to form the Archipelago Securities Exchange, trading stocks listed on the NYSE, the NASDAQ, and the American Stock Exchange (AMEX). The exchange quickly gained popularity with institutional trading firms for its execution speed and the anonymity provided by the electronic trading platform, before merging with the NYSE to form the NYSE Arca Exchange.

By 2005, Archipelago had become one of the NYSE’s main competitors, offering instantaneous electronic executions through the Archipelago Exchange versus the traditional open outcry system of the NYSE. Referred to as ArcaEx, the exchange was winning over day traders and institutional traders by offering fast and cost-effective electronic transactions while traders on the floor of the NYSE gathered around specialists’ posts shouting buy and sell orders.

Prior to the acquisition of Archipelago, 90 percent of trade executions on NYSE were entered manually into the system. Within a week of the NYSE’s acquisition of Archipelago, the NASDAQ acquired the ECN’s biggest competitor, Instinet.

The NYSE and NYSE Arca

Despite concerns that the NYSE’s acquisition of Archipelago would spell the end of traditional floor trading, the open outcry auction system carries on, specializing in the trading of large blue-chip companies, many with roots dating back a century or more. The NYSE Arca, on the other hand, has capitalized on the growing popularity of exchange traded products (ETPs), a category that includes exchange traded funds (ETFs), exchange traded notes (ETNs), and exchange traded vehicles (ETVs). With trading in over 8,000 ETPs, as of March 2016, the NYSE Arca has evolved into the busiest exchange in the world, as measured by listed issuers and trading volume.

As of 2020, NYSE Arca was the world’s leading ETF exchange in terms of volume and listings. The exchange commands 19.5% of the ETF market share in the United States and lists over 2,238 individual ETFs. NYSE Arca listed ETFs have roughly $3.8 trillion in assets under management (AUM).

Much like other electronic communications networks (ECN), NYSE Arca implements a liquidity fee/rebate program to improve overall market depth. For example, market makers are charged a fee to remove liquidity and provided with a rebate for adding it. Fees and rebates typically range between $0.02 and $0.03 per share.