The investment is seen as E*Trade's move to position itself as a leader as an all-electronic provider of financial and investment services for online investors, giving it another electronic channel for rapid order routing and execution. The acquisition will also further position it as a player in the market for technology-enabled ECNs.
ECNs allow orders to be directly routed and displayed on the floor of an exchange or the Nasdaq Stock Market without the need for an intermediary.
Under the agreement, E*Trade and Goldman Sachs, as well as the founding partners, Virago Enterprises and Townsend Analytics, will each own approximately one-fourth of the voting interest in a new company, Archipelago Holdings.
Virago is an online broker catering to investors with active trading accounts. Townsend is a leading provider of comprehensive quote display, charting, and order entry applications for the active trader.
Archipelago was created in 1997, and is one of nine ECNs granted permission by the Securities and Exchange Commission to allow purchase and sale transactions to be matched electronically outside the exchange trading system.
Archipelago currently serves approximately 4,000 individual and institutional traders.
"Archipelago represents a strategic investment in leading-edge technology that will extend our leadership in the evolving electronic financial services market," noted E*Trade CEO Christos Cotsakos. "Ultimately, Archipelago is another way to improve the quality of service by giving our broad base of customers more choices through which their securities orders can be executed."
ECNs are playing a growing role in providing individual and institutional traders alike with fast, cost-effective access to financial markets, both during regular and after-hours trading. ENCs account for some 22 percent of the share volume for Nasdaq stocks and almost 5 percent of orders in securities listed on the New York Stock Exchange, according to the SEC.
Archipelago investors are hoping that the clout brought by E*Trade and Goldman Sachs will help the company establish itself as the premier ECN serving both the retail and institutional markets.
"ECNs are clearly a significant and growing segment of today's financial services market," Duncan Niederauer, a managing director at Goldman Sachs, said in a statement. "Our investment in Archipelago demonstrates Goldman Sachs's continued commitment to provide our clients with the broadest array of liquidity services."