NYSE, Archipelago to Merge

In a concession to the rapidly modernizing world of stock trading, the New York Stock Exchange announced plans Wednesday to merge with electronic competitor Archipelago(AX Quote - Cramer on AX - Stock Picks), ending the NYSE's 212-year history as a private institution.

The two exchanges will form a publicly traded company that is 70% owned by the Big Board and 30% owned by Archipelago, the electronic exchange that was founded nine years ago and currently operates the ArcaEx trading network.

A Wall Street analyst says the new company, which will be called NYSE Group, will have a market value of $3.05 billion, based on those terms.

Sandler O'Neill analyst Richard Repetto says Archipelago shares should be worth about $19.27 apiece. The thinly traded stock closed at $18.76 on Tuesday. In premarket trading Thursday, shares of Archipelago were trading far above Repetto's price estimate, recently changing hands at $26.50, up $7.74, or 41%.

The price could indicate that Wall Street expects a bidding war to break out. That seems unlikely, however, since the only other likely buyer is the Nasdaq Stock Market, which is said to be close to reaching a deal to buy Instinet Group(INGP Quote - Cramer on INGP - Stock Picks).

Of course, the surge might just reflect investor enthusiasm for the new company and the NYSE's formal embrace of more efficient electronic trading -- a move many say is overdue.

The merger, which is expected to be completed in 12 months, follows the Securities and Exchange Commission's approval on April 6 of new rules designed to ensure that stock trades occur at the best available price. While the final version of the overhaul was seen as a compromise that spared the NYSE's open-auction specialist system from extinction, it effectively required the Big Board to adopt a much broader system of electronic trading or see its market share poached by other exchanges.

More broadly, the deal is another step in a series of reforms designed to restore the exchange's reputation in the wake of scandals including former chairman Richard Grasso's pay flap and a two-year-old investigation of specialist trading violations.

As part of the proposed transaction, the NYSE will split off its regulatory functions into a separate, nonprofit entity. The merger is subject to approval by NYSE members, Archipelago shareholders and financial regulators.

Combined with Archipelago, the NYSE will be able to tap into the world of electronic trading and options exchange and electronically traded funds and derivatives -- Archipelago's strong suits -- noted Thain.

"This transaction is an essential step to maintaining global competitiveness and leadership," Thain said.

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