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April 25, 2006

The NYSE Ties Knot with Arca; The Deal is Done

By Michael Scotti

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Let the honeymoon begin! The New York Stock Exchange and Archipelago have not only tied the knot and merged, but they have further joined their bonds in unity through the fresh issuance of NYSE Group stock: symbol NYX.

Roughly 10 days before St. Patrick's Day, the leaders of the new NYSE rang the opening bell. They were their own guests of honor as the new stock began trading. The Big Board and Arca, as it's called, haven't always been the best of buddies. And that morning, a visitor might have confused lower Manhattan with the Bronx, as a chorus of jeers were sent the way of the smiling dignitaries overlooking the historic NYSE floor. The triumphant look on their faces only foreshadowed a brilliant first day performance for the stock. It jumped more than 25 percent. High-fives were in order, making for a lot of happy former seatholders.

Who would have blamed them if they had popped some bubbly right on the spot? Some 16 months ago, a seat sold for $900,000. On the first day of trading, the value of the equivalent in new stock was worth about $6.3 million. NYSE CEO John Thain might just be the seatholders' newly anointed Patron Saint. The Gospel according to St. John has blessed them financially. St. Gerard-former Arca head Gerry Putnam-might not be far behind.


Traders on the floor, however, have another story. They admit to anxiety because of technological innovation and a new trading system that is being rolled out to the floor. Change is never easy. Final implementation of the NYSE's hybrid model is expected to be complete by the end of June. When complete, hybrid will feature reserve and sweep functions, something totally foreign to the current manual NYSE auction process.

"We have to evolve," said one floor broker who asked not to be identified. "We want hybrid to work." This same trader said hybrid brings dramatic change to the NYSE. Technology is the reason. He said new technology "trickled" to the floor over the last 10 years. That is what makes adjusting to hybrid such an eye-opener. "Now we are playing catch-up," he said.

One NYSE clerk described the Big Board's transformation into an electronic marketplace this way, "It's two different worlds colliding."

The NYSE is the largest marketplace in the world when measuring the capitalization of the companies listed there. It is also one of the last exchanges to have a working floor using an auction market system. The NYSE is currently implementing a hybrid marketplace to become compliant with the Securities and Exchange Commission's Reg NMS. This rule is forcing all exchanges to become so-called fast markets, with automatic execution against quotes. The current auction rules on the floor on the NYSE have always rewarded reactive traders, but now under hybrid, traders will have to be proactive.

"There's a lot of uncertainty," the clerk continued. "We don't know what's going to happen because it's uncharted territory." Indeed, under hybrid, investors need to be represented in the specialist's book; otherwise, they will miss out on prints. The crowd will be an electronic one.