NYSE plans merger with Archipelago

The Big Board merger follows reports that Nasdaq will buy Instinet

The New York Stock Exchange announced late today that it has agreed to merge with leading electronic trading system Archipelago Holdings Inc., a move that propels the Big Board away from two centuries of floor-based trading and into the electronic exchange marketplace.

"These are the last two companies I would have expected to make this kind of announcement. With one fell swoop, the NYSE has gained an electronic trading platform, public and for-profit status, and significant market share in [over-the-counter] stocks," said Jodi Burns, a senior analyst at Celent Communications LLC in Boston.

The announcement comes on the heels of news reports this week that Nasdaq Stock Market Inc. is in talks to buy Instinet Group Inc., the other leading U.S. electronic trading company, for between $1.8 billion and $2.5 billion.

A Nasdaq spokeswoman today wouldn't comment on the proposed merger other than saying that "it's just speculation at this point." As for the NYSE announcement, she said, "The New York Stock Exchange is adopting a plan to follow Nasdaq's lead."

The NYSE's merger would create a combined publicly held company called NYSE Group Inc. The merger represents the largest-ever among securities exchanges.

"As we look to the future and to the challenge of competing globally in a high-speed electronically connected world, it is clear that we must do more. This transaction will mean we will be more diversified and transparent, and better able to compete, grow and serve our customers," NYSE CEO John Thain said in a statement.

Jerry Putnam, CEO of Archipelago, said the merger will create a "truly world-class securities marketplace. This combination benefits investors by providing a stronger and broader platform for trading and strengthens our abilities to expand into new products and services."

In recent interviews, Roger Burkhardt, the NYSE's chief technology officer, told Computerworld that the exchange would adopt a "hybrid" model for trading, allowing electronic trading and traditional floor trading to take place side by side -- a move seen as a difficult task.

Burns stressed that the planned merger represents a "major change" to the NYSE's technology infrastructure, and she questioned the new company's ability to combine traditional and electronic trading at the same time.

"In the U.S. equity markets, there are no exchanges or trading systems that have combined the benefits of human trading with computer trading. This NYSE Group will be in an interesting position trying to not destroy the benefits of both types of trading in its attempts to integrate from a technology perspective," she said. "It is hard to imagine how or why the hybrid platform will exist in this new company."

If the deal is approved by the U.S. Securities and Exchange Commission, the current shareholders of Archipelago will hold 30% of the new company's shares and the current owners of the NYSE will hold the remaining 70%.

While the SEC has encouraged manual exchanges to become more automated, it may take exception to a consolidation of four exchanges that represent 80% of trading market share, Burns said.

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