New York Stock Exchange Merging With All-Electronic Upstart Archipelago

In a sign of how electronic trading is changing financial markets, the 212-year-old New York Stock Exchange plans to merge with Archipelago Holdings Inc., an all-electronic exchange founded just eight years ago.

NYSE CEO John Thain says NYSE needs to be more global and innovative, to find new growth opportunities, and to lower its costs. The Archipelago management team "created Archipelago in a fairly short period of time," Thain said in a conference call Wednesday. "I think they'll help spur innovation at the New York Stock Exchange."

By tapping what Thain described as Archipelago's "high-speed, low-cost" all-electronic exchange, the NYSE will market a stock-listing alternative--to compete directly with the Nasdaq Stock Market--to list companies that don't qualify to go public on the NYSE today. It will also let the combined company offer new traded products beyond equities, including derivatives such as options--a business Archipelago's already pursuing--corporate bonds, and other listed products.

The transaction needs approval by NYSE members and Archipelago shareholders. The NYSE has proposed paying $400 million cash to NYSE members, plus giving them 70% ownership of the combined companies. Archipelago shareholders would own 30%. Thain planned a town hall meeting for Thursday with NYSE members to present the plan.

The two companies predict $100 million in costs savings in 2005 and 2006 and another $100 million in 2007. However, they plan to keep two distinct technology organizations. Steven Rubinow, Archipelago's chief technology officer, will continue to lead that group, which has operations in Chicago, New York, and Orlando, Fla., and CTO Roger Burkhardt will lead the NYSE team.

The combined company won't attempt to merge the Archipelago electronic platform with the NYSE's systems, designed to support floor-based trading, Thain said. The NYSE has been slowly moving to add electronic trading by giving its floor-based trading specialists tools for what's referred to as "hybrid" trading. Thain predicted that floor-based trading operations, where specialists make markets in particular stocks, would continue to be an important source of liquidity and trading volume. "The floor really does add value," he said.

The move taps into several hot trends in financial trading: the fast growth of electronic trading and ownership of exchanges going to publicly traded shares rather than member-owned. For example, the Chicago Mercantile Exchange, which went public in 2002, saw electronic trading make up 69% of the exchange's total volume in January, up from 43% a year earlier.

Archipelago started as an electronic communication network, or ECN, that provided an electronic platform through which traders could execute trades on stocks listed on Nasdaq and the NYSE. Such ECNs thrived in the day trading boom, and built their reputations on providing fast and transparent pricing information and trade executions. Archipelago became a stock exchange by joining with the Pacific Stock Exchange, and went public in 2004. "One of our stated goals was to be the preeminent U.S. exchange," Archipelago CEO Gerald Putnam said. "If we complete this deal, I think you can check that one off."