So just why is the Big Board afraid of Gerald Putnam's tiny Chicago-based Archipelago?

Just as Barnes & Noble and FAO Schwarz worry about and eToys, the New York Stock Exchange (and also the Nasdaq Stock Market) are nervous about the handful of alternative electronic trading systems nipping at their heels.

These systems, called electronic communication networks, or ECNs, may be small, but they understand the new Internet world of day traders, online investors and software that can give tiny companies powerful capabilities.

Putnam was a little-known entrepreneur, running a small Chicago-based securities firm, when in 1996 the Securities and Exchange Commission decided that market participants should be required to publicly display more customer orders. That meant that ECNs would be able to interact directly with the Nasdaq market, giving them the link they needed to break into the big time.

Putnam quickly conferred with some software designers, who within weeks built the software to run Archipelago. If Archipelago turns out to be a big success, it may be due in large part to that software.

"Our model says give us your orders. If we don't have the best prices and somebody else does, then our system will automatically route your order electronically to that place. Our software enables our customers to access the whole marketplace, to do one-stop shopping," Putnam said.

A while later, Putnam called Goldman Sachs to try to establish electronic links between the two operations. "They said they were interested, but that they were even more interested in our business model," Putnam said.

Goldman Sachs invested in Archipelago, as did E-Trade Group Inc., J.P. Morgan & Co., Merrill Lynch & Co. and CNBC, the business news network.

To understand why ECNs are a threat to the NYSE and Nasdaq, and why big Wall Street firms would be interested in them, it is important to understand what happens when someone wants to buy or sell stocks.

When you place a trade online, an e-mail message is sent to your broker. If the brokerage has the stock in its inventory, your trade may be executed with that firm. Otherwise the broker will route the order to a "market maker," a firm that agrees to buy or sell particular stocks so that investors are always able to trade.

The broker is supposed to route the order to the place offering the best stock price at that moment. But often he sends it to the firm that is paying the brokerage the most for the orders.

Some investors use limit orders--an order to buy at a set price--to protect themselves from wild fluctuations. For instance, an investor might tell a broker to buy Microsoft only at $87 or less. Brokers are increasingly sending those limit orders to ECNs, which electronically match buy and sell orders at specified prices.

The fear at the large stock markets is that as their major customers--such as Goldman Sachs and Merrill Lynch--invest heavily in ECNs, they will shift more of their business to these electronic competitors.

Institutional investors say they can save lots of money by using ECNs. "We can move 2 million shares of Dell in 10 minutes through three ECNs, saving time and money," said Harold S. Bradley, senior vice president and portfolio manager at American Century.

Meanwhile, the SEC opened another door for Archipelago about a year ago, when it said that ECNs could register to become stock exchanges. Archipelago has done that and is now waiting for an SEC answer.

"There's no reason to think it won't happen," Putnam said.