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June 20, 2005

Big Board in a Corner; No Option But to Merge

By Gregory Bresiger

The NYSE had no choice but to merge with an electronic partner such as Archipelago Holdings, according to trading executives. The regulatory approval of the Reg NMS market structure plan pushed the New York Stock Exchange into a defensive mode to protect its listed franchise, they said.

"It only made sense for them to either develop or merge with an electronic platform," according to John Wheeler, vice president and director of U.S. Equity Trading at American Century Investments, which holds a one percent stake in Archipelago.

"The New York had been behind the world and had to do something like this," he added. The NYSE/Archipelago requires regulatory and shareholder approvals.

Several trading executives agreed that the NYSE had to pursue the deal. They said the merger will lead to faster executions.

It certainly made sense for the NYSE because they had to find an electronic venue," William Yancey, president of Automated Trading Desk Brokerage Services, told Traders Magazine.

"People should be excited that the NYSE finally got religion," said Jamie Selway, a managing director of White Cap Trading and a former economist with Archipelago. "New York absolutely needed to do this," he added.

The Big Board wants to protect its listing dominance, according to trading executives. It has an approximately 80 percent share in its own listings. Presently, it doesn't trade Nasdaq on its floor. However, now Archipelago, Nasdaq's main rival, has a strong interest in maintaining Big Board's listed share dominance at the same time that it is trying to steal business from Nasdaq.

Faster executions, trading executives said, are critical in the light of the adoption of Reg NMS, which speeds up markets, imposing a one-second-execution standard.

"The adoption of Reg NMS threatened New York's stranglehold on listed stocks," Wheeler said. He said that exchanges that have adopted electronic standards alongside manual trading have seen the latter "get killed by electronic trading."

Wheeler said that the NYSE merger, along with the Nasdaq purchase, will produce some big losers in the short run-specialists.

But several specialists told Traders Magazine that the NYSE deal, as it is presently constituted, will be attacked. Gerald Putnam, chief executive of Archipelago Holdings, would receive some $24 million for his stake in the company when the deal closes.

"Why should we pay Gerry Putnam $24 million? That's just too much. I'm going to vote against the deal," an official of a specialist firm told Traders Magazine.

Selway said that the NYSE/Archipelago merger was "a bolder stroke" than the Nasdaq/Instinet merger because "New York needed a bolder stroke." Indeed, some observers argue that the Nasdaq merger is routine.

"The Nasdaq deal was basically just buying another ECN," said Harrell Smith, manager of the securities and investments practice at Celent Communications. "But the NYSE deal was groundbreaking," Smith said. He questioned if the NYSE's original hybrid plan would have been a success.

"Before this deal with Arca, the NYSE was preparing for the worst. We believe that they were going to lose 10 percent to 15 percent of their listed share," Smith said.