NYSE Merger Won't Lead to IT Makeover

New York Stock Exchange Inc. last week agreed to merge with electronic trading exchange Archipelago Holdings Inc., marking the Big Board's full embrace of e-trading.

But the deal -- which coincided with a similar acquisition move by Nasdaq Stock Market Inc. -- doesn't mean the NYSE's trading operations will get a rapid makeover via an influx of technology from Chicago-based Archipelago, according to officials at the two exchanges.

Steve Rubinow, CTO of Archipelago Holdings Inc.
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Steve Rubinow, CTO of Archipelago Holdings Inc.
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Steve Rubinow, Archipelago's chief technology officer, said that while the two exchanges will likely learn a lot from each other's vastly different technology infrastructures, their IT departments will remain separate and their systems will run in parallel for the foreseeable future.

The two IT teams will have a close working relationship, Rubinow said, but he added that "the nature of that working relationship has yet to be spelled out." As for the future of the two trading approaches, "it's really up to what customers want to do," he said. "They'll help us determine what the future of all these systems will look like."

Different Strategies

The separate paths planned by the NYSE and Archipelago contrast with the technology integration strategy that Nasdaq outlined for its proposed acquisition of Instinet Group Inc.'s electronic exchange.

The addition of Instinet's trade-matching engine should make "our technological platform more competitive," Nasdaq CEO Bob Greifeld said. Nasdaq also noted that it expects Instinet's technology to help it realize "significant savings."

The NYSE will move to a hybrid of electronic and traditional trading.
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The NYSE will move to a hybrid of electronic and traditional trading.
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The NYSE's postmerger IT strategy hews to a plan that it had already put in place for supporting a mix of trading methods. In an interview last December, Roger Burkhardt, the NYSE's CTO, said the exchange planned to adopt a hybrid model that would allow electronic and traditional floor trading to take place side by side.

Echoing Rubinow's comments, an NYSE spokeswoman said last week that officials there and at Archipelago "are committed to going forward with the hybrid model, and the markets will remain distinct." However, she added that the two exchanges "will be exploring ways to work together."

If the exchanges are kept separate, "a lot of the IT challenges would be minimized," said Bill Cline, a financial industry consultant at Accenture Ltd. But both Cline and Jodi Burns, an analyst at Celent Communications LLC in Boston, said it's likely that traders will ultimately determine the fate of the NYSE's open-outcry auction system.

Burns added that she can't see why the combined company would keep the NYSE's two-century-old approach alive for long, because electronic trades can be processed much more quickly than those done on a trading floor.

Currently, the NYSE electronically matches only about 10% of its trades, according to Larry Tabb, an analyst at The Tabb Group in Westboro, Mass. The NYSE also hasn't been aggressive about adopting technology to automate the trade-matching process, Tabb and other analysts said. For example, trade orders are still manually key-punched into the exchange's clearing and settlement system.

Tabb said the planned merger would provide the NYSE with access to "very good front-end technology" for tasks such as managing the flow of trade orders and accepting different types of orders. But, he noted, "developing the capability for floor brokers and specialists to interact with an electronic flow will take time -- time to develop and time to adapt."

Copyright © 2005 IDG Communications, Inc.

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