Pacific Exchange Goes Virtual

After more than a century of operation, the Pacific Stock Exchange soon will shut down its trading floors in Los Angeles and San Francisco and move into cyberspace, the new address for electronic commerce. It is the first bricks-and-mortar stock exchange in the United States to convert to fully electronic trading. Other regional exchanges, and even the New York Stock Exchange, are under the same competitive pressure from cheaper, faster electronic markets and may have no choice but to follow.

The Pacific exchange has joined forces with the Chicago-based electronic communications network Archipelago to create a virtual exchange. Its traders, instead of shouting themselves hoarse on the floor, will match buyers and sellers on computer screens at its member firms. Archipelago will supply the electronic wizardry, and the Pacific exchange will bring in the clout, the authority to trade stocks listed on other exchanges and the supervisory mechanism. The NYSE is also moving toward a major upgrade of its electronic capabilities.

Upstart electronic communication networks such as Archipelago, which match orders directly and do away with the middlemen who broker deals on exchanges, pose the greatest threat to regional stock exchanges. Teaming up with the ECNs, as the Pacific Exchange is doing, allows regional exchanges to overhaul their outmoded business model and gives them 21st century electronic tools.