Stock Futures

Origins of a Challenger

Its business is stock trading, but at its heart, Archipelago is a technology shop. Its headquarters, in an office tower in downtown Chicago, is glitz free. Unlike at the Exchange, no paper litters the floor; no shouted bids fill the air. At Archipelago, the work of electronically matching buy and sell orders occurs out of sight, in a high-security server farm that takes up two entire floors.

On a Monday morning in early March, about 30 staffers crowded into a standard-issue meeting room. Seated at the head of the conference table, outfitted in a preppy Ralph Lauren polo shirt and white khakis, a youthful-looking Putnam could easily have been mistaken for a rank-and-file employee (which he has been on more than one occasion). Surrounding him were Archipelago's tech-team leaders, black belts in the complex, arcane world of markets software.

Measured in the split-second rhythms of stock trading, Putnam's experience melding high tech with high finance extends over several lifetimes -- all the way back to the mid-1980s. As a rookie institutional broker at options trader Walsh, Greenwood & Co., Putnam got a close-up look at how a breakthrough technology could yield big commission dollars.

Walsh, Greenwood had developed the first PC-based options-quotation system, called the Shark, which enabled users to build real-time graphs and analytics from trading data. Demand grew so high that Putnam soon found himself selling the Shark to institutional investors. "I saw how Wall Street was evolving, and I saw how the PC was evolving," he says. "Then someone came along and wrote a program to help Wall Street leverage the PC. I knew that it would change the way we did business."

After the market crashed in 1987, Putnam left Walsh, Greenwood and drifted through four securities firms in six years, chafing under the bureaucracy. He hit rock bottom in 1993, when Prudential fired him. The company accused him of making an unauthorized trade on behalf of a client and later dropped an arbitration case against him when it failed to substantiate the allegation. By then, it was too late. Putnam's tenure on Wall Street was over. "I figured I could screw up by myself just as easily as I could with someone helping me," he says. "So I decided to start my own company."

He launched an online broker-dealer to serve institutional traders and rapid-fire day traders. Tellingly, he named it Terra Nova. He was bound for the new world of electronic trading. Right around the time that he was starting the new company, Putnam met Stuart Townsend, who, with his wife, MarrGwen, was running Townsend Analytics Ltd., a software-development company for financial markets. The Townsends are relatively unknown outside the exotic world of markets software, but within that world, they are highly respected. They were impressed with Putnam's ability to spot market opportunities for new technology. And Putnam was bowled over by Stuart Townsend's revolutionary piece of software called RealTick -- the first-ever Windows-based real-time quotation system. Terra Nova quickly entered into a partnership with Townsend Analytics to sell RealTick to institutional traders.

"But things really became interesting when Stuart taught RealTick how to trade," recalls Putnam. Townsend wrote an algorithm that enabled traders to view live bids and offers and get immediate access to Nasdaq to execute trades. Putnam and the Townsends marketed the souped-up RealTick to "SOES bandits" -- day traders and momentum traders who exploited the inefficiencies of Nasdaq's Small Order Execution System. "These guys would fire orders at Nasdaq market makers who were slow to move prices, and the market makers would have to fill the order through SOES," says Townsend. "Then they'd turn around and sell the order to people who had already adjusted their prices. They made a lot of money from dealers who were unprepared for the efficiencies of the electronic marketplace."

Make no mistake: Speed is not a priority for every trader. For institutional investors such as retail mutual funds, it's more important to find deep liquidity and to get that big block order filled in one transaction, no matter how long it takes. But RealTick's ability to pick off slow-moving market makers pushed Putnam and the Townsends to seize quickly on the lesson that the speed of computer-driven trading systems would radically change the way investors did business with markets.