NYSE to Merge with Archipelago

The New York Stock Exchange has announced its intention to merge with electronic trading firm Archipelago. It will bring the NYSE into the 21st century in trading technology, and it will end it's not-for-profit status. Above all, it will increase transparency for the exchange's actions. And after the recent troubles with specialists and Mr. Grasso's excessive pay, this can only help.

If the SEC goes along and the boards approve, members of the NYSE will get cash and stock in the new entity, and they'll get a chance to shoot the idea down as well. The NYSE's regulatory division will get spun off (and remain not-for-profit), which is a major decision. Keeping this separate gives more independence in the event it is necessary to discipline the exchange or its member/stockholders. In addition, the merger will make it easier for the NYSE to implement the SEC's rules that require traders to take the best price offered, no matter what exchange or market posts it.

Archipelago is a Chicago-based firm that trades common stock, preferreds and stock options. About a quarter of its trades are NASDAQ-based, but this may be dropped. Its quarterly profits were $21.9 million, about 55 cents per fully diluted share, and it have been public only since August. So, while it's a money maker, it doesn't have such a long record as a public firm that the NYSE will have to change things there.

The down side to this is the loss of competition within the American stock market. But here, the question is one of quality versus quantity. Any merger reduces the number of actors in the market, and that has an effect on competition. At the same time, this merger makes the NYSE better able to compete against not only NASDAQ but the London and Frankfurt exchanges. And if it manages to create a hybrid market of electronic trading and floor trading that is superior to all-electronic transactions, then the customer will be the long-term winner.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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