An Electronic Trader's Big Score

Archipelago founder Gerald Putnam's deal with the NYSE puts the pioneer right in the power spot he has been aiming for

Gerald D. Putnam, a burly 46-year-old ex-rower from Philadelphia, has always wanted to shoulder his way into the big-time. Now, by selling his upstart Chicago-based Archipelago (AX ) electronic stock exchange to the New York Stock Exchange, his upstream journey has reached the headwaters.

Putnam is an ex-stockbroker who some in the industry regard as a visionary -- and others a renegade. He'll become one of three co-presidents under CEO John Thain in the newly formed NYSE Group. As such, Putnam will be in a position to push the growth of electronic trading, something long resisted by floor-based specialists and others in New York but a trend regarded by many outsiders as inevitable. "By putting the two companies together, we're going to offer a lot of new choices for people," Putnam said in an interview with BusinessWeek Online after announcing the sale.

CONCILIATORY SOUNDS. Putnam has his work cut out for him. One big challenge will be bridging huge cultural gaps between the fast-paced world of ArcaEx's electronic traders and the floor-based culture of New York, where specialists prefer to handle the trades -- and take a cut. He argues that he won't face a problem because investors will simply be given a choice between trading on ArcaEx, which will continue to operate as a Chicago-based computerized market, and the floor in New York. They'll have the best of both worlds, he says.

Indeed, Putnam of the Windy City -- who has at times taken jabs at New York for what he views as its conservative ways -- is already making conciliatory sounds. While he relished his role as providing a "scrappy competitor" to the Big Board, he acknowledges that floor-based traders in the Big Apple still command about 80% of the share of business in stock trading, suggesting that plenty of investors must be happy with it. "New York wouldn't have 80% of the market share if people didn't see value there," he says.

He plans to stay in the Chicago area to oversee his computerized system and commute to New York. But Putnam insists he's not viewing his tenure at the NYSE as a short-term affair. "I'm in with both feet," he says, noting that he'll work closely with CEO Thain to bolster electronic and options trading. "I think I can really help John."

MISCHIEVOUS AND CHARMING. Then again, Putnam could prove to be a handful. Though warm and engaging, he was dismissed twice by Wall Street firms -- Oppenheimer & Co. in the mid-1980s, when sales were ebbing, and Prudential Financial in 1992, when he had a disagreement with superiors. Then, in 1996, he got the idea for ArcaEx, just as electronic trading was in its infancy.

When he pressed his case for certain market changes to officials at Nasdaq, they brushed him off. So the dogged Putnam, who cut his teeth in Catholic school in Philly -- where teachers remember him as mischievous -- and is a University of Pennsylvania graduate, built his own system. Teaming up with a couple Chicago software whizzes, he charmed some deep-pocketed investors to back him, including Goldman, Sachs (GS ). and J.P. Morgan Chase (JPM ), along with such electronic sophisticates as E*Trade (ET ).

ArcaEx quickly grew into an electronic trading network of choice in the U.S. Putnam and his colleagues had devised a way for investors to get the best prices for stock that bypassed Nasdaq's aging automated marketplace. By 2003, ArcaEx was well on its way to snaring 20% of the volume is Nasdaq-listed stocks, along with nearly a third of the volume in exchange-traded funds listed on the American Stock Exchange. It even has since then taken about 3.5% of the volume in NYSE-listed stocks.

But for Putnam, who enjoys tracking deer with bow and arrow in northern Wisconsin, the hunt wasn't over. He took Archipelago public last August, raising $58 million at $11.50 a share and aiming to use the cash and stock to do deals.

DAILY VOTES. Last fall, he revealed to BusinessWeek what he was really after. "We've got the New York Stock Exchange to work on," he said. His investors have been believers. Even as the markets have languished in recent months, Archipelago's shares rose by over 50% to close above $18.70 before the Apr. 20 deal was announced. During the morning of Apr. 21, the stock climbed 41%, to $26.50.

Of course, instead of taking on or taking over the Big Board, ArcaEx is being subsumed by it. But once the deal is done, Putnam's shareholders will become holders of newly created publicly traded stock in NYSE Group. The stock will trade on the New York exchange under a new symbol, NYX. Then, investors will have a chance to judge -- with a vote cast every market day through the stock price -- on whether they believe Putnam and Thain, an odd couple in the market world, are doing the best job.

Weber is BusinessWeek's Chicago bureau chief

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