In order to offer their customers the latest in equity trading services, some of Wall Street's biggest investment and commercial banks are taking stakes in several companies that run electronic transaction systems.
Merrill Lynch & Co., J.P. Morgan & Co., and Citigroup's Salomon Smith Barney unit have recently made private investments in alternative trading systems that promise to reduce execution costs and cut prices for investors.
Analysts estimate the investments at $15 million to $25 million.
On Thursday, Donaldson, Lufkin & Jenrette, Fidelity Investments, Charles Schwab Corp., and options specialist Spear, Leeds & Kellogg jumped into the fray, saying they would form a new company to operate their own electronic communications network.
These networks match up buy and bid orders. They often operate after the close of the trading day, an attractive feature for brokerages that target retail investors who like to trade at all hours.
"All the Wall Street firms want to make sure they have exposure, either from investments or partnerships," said Daniel Burke, a senior analyst at the e-commerce research firm Gomez Advisors in Lincoln, Mass. "You could almost call it a hedge against what future trading will look like."
J.P. Morgan held off on any major investments until May of this year, when it became one of five investors in Tradepoint Financial Networks, the electronic stock trading network in the United Kingdom. But then in June it took a 20% stake in Archipelago, a network in the United States. "We have a strategy of investing at the later stage, with a larger investment," said Robert Gasser, Morgan's managing director and head of equity trading.
Meanwhile, Goldman Sachs Group Inc. has taken smaller stakes in a number of networks and alternative market systems as it waits to see which model will be the market leader.
Last year, it took non-controlling stakes in Brass Utility LLC and Brokertec, a fixed-income network. Earlier this year, Goldman also took a position in Archipelago.
The investment and commercial banks involved say their interest in alternative trading networks has partly been spurred by the needs of institutional clients, who want to insure that their stock positions are highly liquid.
Like J.P. Morgan, Salomon Smith Barney has taken a slightly more selective approach, gambling that the networks it picks will be the ones that have the longest life spans and best quality systems. Earlier this month, it joined Morgan Stanley Dean Witter & Co., Merrill Lynch, and Goldman Sachs in investing in Primex Trading, a firm whose software finds the lowest stock prices and most liquid trades.
Salomon said its investments in alternative stock trading systems reflect the needs and desires of its retail and institutional clients. "What our customers are interested in are the best executions (of their trades)," said William Harts, a managing director in equity trading.
Commercial and investment banks actually benefit as their competitors invest in and utilize the same systems because the network becomes more liquid as brokerages supply more orders.
Smaller commercial banks, even those with retail brokerages, have not taken positions in these networks. This is partly because unlike the big securities houses, such as Merrill and DLJ, they use other firms to settle their trades.
"These banks don't generally self-clear," Mr. Burke said. "And a lot don't have the big capital markets facilities" that would make an investment worthwhile.