Wall St. Opens Wallet for Exchanges’ Electronic Rivals

Wall Street firms and other investors are showering money on new electronic trading systems that compete with major exchanges, raising the ante in the battle to change the way stocks are traded.

Island ECN, the second-largest alternative trading system, Thursday received a $25-million investment from Microsoft Corp. co-founder Paul Allen, now a venture capitalist. At the same time, investment and commercial bank J.P. Morgan & Co. said it will take a 20% stake in another of these so-called electronic communications networks, Archipelago.

“This validates the importance of the electronic networks,” said Matt Andresen, Island’s president. “In the end, it’s all an endorsement of this business model.”

ECNs already handle millions of stock trades a day using skeleton staffs and computers that line up anonymous buy and sell orders from brokerages and match them automatically--eliminating the role of dealers and stock exchanges.

Although primarily used by institutions, ECNs’ availability to small investors is growing.

ECNs have sprung up because of new technology and customer pressure for low costs and fast trading. They have taken business away from exchanges by offering customers cheap trade execution during regular market hours and beyond. The Nasdaq electronic stock market and the New York Stock Exchange have responded by considering longer hours and alliances with ECNs.

Wall Street firms also have taken note and bought into the new networks, often spreading their bets among a number of them.

Just this week, brokerage firm Merrill Lynch & Co. and investment bank Goldman Sachs Group Inc. formed a partnership with stock trader Madoff Securities to develop an electronic trading system that aims to reduce the costs of trading stocks.

Both Merrill and Goldman previously invested in a range of ECNs, and Goldman, along with Internet broker E-Trade Group Inc., also holds a minority stake in Archipelago. Waterhouse Securities, the discount and Internet broker owned by Canada’s Toronto-Dominion Bank, last month invested $25 million in Island.