What it means
An electronic communications network is simply a computer system that takes orders from many participants and pairs compatible buyers and sellers automatically. Before such venues existed, large share orders were handled by intermediaries who quoted a spread and took a margin for their trouble.
Automatic matching narrowed those spreads and reported trades in a fraction of the time. For a company that issues shares, or an investor who deals in them, this history matters because it changed the cost of trading.
Where an institution once paid a visible commission plus a wide spread, it now pays small per share fees plus a much narrower spread, with the real cost measured in execution quality rather than in headline commission. Finance teams buying back their own shares, or running an employee share plan, feel that difference directly.
The competitive pressure from venues of this kind pushed traditional exchanges to automate and then to buy the newcomers. Archipelago itself listed, grew by acquisition and was eventually merged into the New York Stock Exchange group, which is how a floor based institution became largely electronic.
Similar consolidation happened in other markets around the same period. Two nuances are useful.
Trading in a single share is now spread across many venues, so the best available price is a composite picture rather than one exchange's quote, and brokers have a duty to seek the best outcome for the client across them. The word archipelago also has its ordinary geographic meaning, so context matters when it appears in a document.
In practice
Real-world examples.
Example
A corporate treasurer running a $5,000,000 share buyback instructs the broker to work the order across electronic venues through the day rather than in one block, aiming to beat the daily volume weighted average price.
Example
An asset manager reviews its broker list and finds that the cheapest commission rate is not producing the best overall cost once spread and market impact are measured. It moves business to a broker with a higher rate but better execution quality.
Example
A company secretary explains to the board that the firm's shares trade on several venues, so the single price shown on a news site is a consolidated figure rather than the price at one exchange.
Formula
Calculation
Execution saving = (benchmark price - achieved price) x number of shares, then subtract venue and broker fees. Suppose a pension fund buys 20,000 shares of a company and the best displayed offer when the order is sent is $25.10. The order is worked across electronic venues and achieves an average price of $25.06, so the gross saving is $25.10 - $25.06 = $0.04 per share, which is $0.04 x 20,000 = $800. Venue access fees of $0.003 per share add 20,000 x $0.003 = $60, leaving a net saving of $800 - $60 = $740 on a trade worth 20,000 x $25.06 = $501,200. That is about 0.15% of the value of the trade, which is the kind of margin that matters when a fund trades the same position repeatedly.Case study
Seen in the real world.
Hartlen Mutual is an illustrative, fictional fund manager that measured trading cost only by the commission on its contract notes. On that basis its cheapest broker charged $0.02 a share and looked clearly the best value.
The operations team began measuring achieved prices against the market price at the moment each order was released. Over a quarter of trading worth $90,000,000, the cheap broker's orders came in about 0.08% worse than the market at release, costing roughly $72,000, while a broker charging $0.035 a share delivered about 0.01% better, a difference worth far more than the extra commission.
In this illustrative case the firm rewrote its broker review to put execution quality ahead of commission rate. The commission line in the accounts went up, and the total cost of trading went down.
Watch out
Common mistakes.
- Judging trading cost by commission alone, when the spread and the market impact of the order usually matter more.
- Assuming a share has one price on one exchange, when trading is spread across multiple venues and the quoted price is a consolidated one.
- Confusing the trading venue with the clearing and settlement process, which is a separate step with its own costs and risks.
Questions
People also ask.
What is an electronic communications network?
A computer system that matches buy and sell orders directly between participants, without a human intermediary setting the quote.
Does Archipelago still exist under that name?
Not as an independent business; it was combined with the New York Stock Exchange and continues as the venue known as NYSE Arca.
Why does execution quality matter for a company rather than just an investor?
Because companies buy back shares, settle employee share plans and place new stock, and poor execution on those trades is a real cost to shareholders.
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