Archipelago IPO Looks Well-Timed

Archipelago just announced plans to go public, and already the comparisons to Instinet(INGP Quote) have begun. Yet there are reasons to believe Archipelago will perform better in the public domain than its competitor has so far.

Instinet has declined 59% since making its public debut in May 2001, and the company has been bleeding red ink for much of that time amid a softer market for stock trading and increased competition.

It's hard to know how Archipelago has been performing because as a private company it does not release financial results. But the firm has rapidly increased its share of the market in recent years and now processes 24% of Nasdaq trades, according to a spokeswoman. Instinet, which has been around far longer, executes almost 27% of Nasdaq trades.

In a tersely worded press release late Monday, Archipelago said it intends to file a registration statement with the Securities and Exchange Commission in the next few months, with a view to going public sometime next year.

The timing of the IPO certainly bodes well for Archipelago. When Instinet went public, the economy was in recession and the stock market in the middle of a devastating bear market. But this year, conditions have started to improve and the trend is expected to continue into 2004.

Market makers "should do a whole lot better as the market comes back to life," said Charlotte Chamberlain, an analyst at Jefferies & Co.

Archipelago also stands to benefit from the recent investigation into specialists at the New York Stock Exchange, say some analysts. The resignation of NYSE Chairman Richard Grasso, who was a strong advocate of the specialist system, represents an opportunity for new players to take a piece of the NYSE pie, according to Daniel Goldberg, an analyst at Bear Stearns.

"Over time, I see a significant amount of volume that is now done through specialists shifting to the ECNs," he said. "I'm definitely positive on the ECNs and alternative trading systems of the world right now with all the upheaval at the New York Stock Exchange."