NYSE to buy electronic rival

/ Source: The Associated Press

The New York Stock Exchange, famous around the world for its busy trading floor, is getting a computerized boost — and will be worth a lot more, too.

The 213-year-old exchange vaulted into the top ranks of electronic stock trading Wednesday by announcing a merger with all-electronic rival Archipelago Holdings Inc.

The stunning move, which took Wall Street by surprise, will also transform the NYSE into a for-profit, publicly traded enterprise.

Those busy floor traders, whose auctions for stocks help keep prices stable, won’t go away. Instead, by offering a fast electronic option alongside the slower but less volatile floor-based operation, the NYSE hopes to compete more effectively.

Specifically, the NYSE hopes to challenge its chief U.S. rival, the Nasdaq Stock Market Inc., and tackle increasing global competition.

“This is an essential step to maintaining our global competitiveness and leadership,” NYSE Chief Executive John Thain said. “I believe that the combination of Archipelago and the New York Stock Exchange will be the leading securities market in the United States and in the world.”

The NYSE’s 1,366 seat holders, its current owners, will receive $400 million in cash and 70 percent of the shares in the new company, while Archipelago’s shareholders will retain 30 percent of the shares, Thain said at a news conference.

Using the value of the NYSE’s latest seat sale — $1.62 million — as a guide, the NYSE is roughly valued at $2.2 billion. Archipelago is valued at $844 million using Wednesday’s closing stock price.

The new entity, a holding company to be called NYSE Group Inc., will spin off the NYSE’s regulatory arm — recently invigorated after coming under intense criticism for failing to stem a floor-trading scandal — into a not-for-profit oversight entity.

That part of the deal answers the demands of some NYSE members who have been agitating for the exchange to turn for-profit in order to better compete as a business.

“I think the regulatory structure we’re proposing will be a model for other self-regulating agencies,” Thain said.

ArcaEx Chairman and CEO Jerry Putnam said the merger would create opportunities for NYSE Group to expand its trading into other areas, including options and other equity derivatives.

The exchange will not trade Nasdaq-listed stocks on the floor of the NYSE, but will continue to trade them through ArcaEx’s electronic market. The NYSE also will continue its plan to create a hybrid market, combining its floor trading with an enhanced electronic system under development.

The merger also improves the NYSE’s ability to compete following the Securities and Exchange Commission’s approval earlier this month of Regulation National Market System. The regulation requires stock traders to accept the best bid or offer available, no matter which stock exchange or market posted it — but customers could go to another market if they want to complete trades as quickly as possible. This option makes the pre-merger NYSE less competitive.

Thain will remain CEO of NYSE Group, while Putnam will become president and co-chief operating officer. The management teams of the two companies will be integrated, Thain said, and a transition team is already working on the deal.

Pending regulatory approval, the merger is expected to be completed in either the fourth quarter of this year or the first quarter of 2006, Thain said. Three ArcaEx board members will join the NYSE board. The company will continue to be headquartered at its iconic Wall Street building in New York.