Archipelago

DEFINITION of 'Archipelago'

Archipelago is an electronic communications network (ECN) that merged with the New York Stock Exchange (NYSE) in 2006 to form the NYSEArca Exchange. 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.

BREAKING DOWN 'Archipelago'

The electronic NYSEArca exchange allows stock and options trading and offers one of the largest ECNs in the world. ECNs allow for automated trading, passive order matching, after-hours trading and instantaneous order execution.

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.

In March 2000, Archipelago partnered with the Pacific Exchange to form the Archipelago Securities Exchange, trading stocks listed on the NYSE, the NASDAQ and the American Stock Exchange. 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 NYSEArca Exchange.

The NYSE and Archipelago

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% 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 NYSEArca

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 NYSEArca, 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 NYSEArca has evolved into the busiest exchange in the world, as measured by listed issuers and trading volume.

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