For Citi, an Exchange of Its Own?

For Citi, an Exchange of Its Own?: "It plans to develop a trading system, which won't compete with the Big Board and Nasdaq right away but could provide a lower-cost alternative


If the New York Stock Exchange and Nasdaq hope to raise prices for stock traders this year, Citigroup (C ) may have an antidote. One of the nation's biggest stock traders, Citi is backing alternative trading systems that it expects will offer cheaper and faster trading venues. Now it plans to build up its own.

Citi's Jan. 18 announcement that it will develop a trading platform based on the OnTrade electronic communications network (ECN) that it acquired last week is the bank's latest and biggest shot across the bow of the two giant markets, experts say. Citi last year took 10% stakes in both the Boston and Philadelphia exchanges, joining with other big trading firms in investing in those potential alternatives. Earlier, in 2004, it acquired the Lava order-routing system that beefs up its electronic trading prowess.

All the moves come in advance of so-called Reg NMS, a new rule from the U.S. Securities & Exchange Commission set to go into effect later this year. The rule, part of a longstanding national market system initiative, will require Wall Street to route orders for stock trades to markets that offer the best prices.

If the NYSE or Nasdaq offer the best quotes, stock trades will go to them. But if better prices can be found in alternative markets, especially those that boast of lower fees, they can capture the business.

By building up its electronic trading power, Citi's managers plan to be ready to comply with NMS as well as to strengthen bulwarks against the big exchanges raising fees. "Like most of the major players, they are developing either investments or platforms as a hedge to the two major exchanges," says Sandler O'Neill & Partners analyst Richard H. Repetto.

Citi hasn't spelled out what exactly it plans to do with the OnTrade system, which was one of the last freestanding ECNs. While officials at the bank say they don't want to build a full-fledged alternative exchange that would compete across the board with either the NYSE or Nasdaq, they do want to have lower-cost alternatives in case prices rise too sharply at the big two. "