Fidelity in Joint Venture to Form Alternative Trading Company

August 25, 2005 ( - Fidelity Investment has joined forces with four partners in a sweeping new effort to create an electronic trading network seeking as much as 5% of the nation's trade execution business.

Fidelity Brokerage and the Boston Stock Exchange are teaming up with Wall Street firms Citigroup, Credit Suisse First Boston, and Lehman Brothers to launch the Boston Equities Exchange, according to the Boston Globe. The partnership involves Fidelity’s brokerage operations, which trade for individual and institutional investors, and not its mutual fund unit.

The group said the new exchange will offer a trading alternative to the New York Stock Exchange (NYSE) and Nasdaq Stock Market, both of which are in the midst of combining with leading electronic trading networks in deals that mutual funds and brokers fear could produce a ”duopoly” in electronic trading that could stifle competition and lead to higher trading costs. The New York exchange is merging with leading electronic trading provider Archipelago Exchange, while Nasdaq is in the midst of acquiring another leading operation, Instinet Group Inc.

“We think it’s important to maintain competition within the marketplace to make sure we can get the lowest trading costs and best execution for our customers,” Mark Haggerty, executive vice president of Fidelity Brokerage Co., told the Globe.

The newspaper quoted unnamed sources who indicated that Boston Exchange would own around 64% of the new entity, while the four outside companies will split equally the remaining ownership and contribute around $20 million to the start-up costs.

The spate of activity is driven, in part, by new government rules that require that trade orders be filled at the best price. Analysts said this will place more emphasis on high-tech, lower-cost systems. The rules also will bolster alternative exchanges such as the new Boston venture because customers would have to use them if they provided the best price on a transaction, according to the Globe report.

The Boston exchange has seen its business dwindle and revenue plummet 20% in 2004. But the move would also hasten the exchange’s transformation from the old model of human-based trading operations. In 2004, the Boston Stock Exchange launched a new electronic platform for trading options, and has since garnered about 6% of that market.