NYSE, Archipelago to Merge

Thain will become CEO of the new entity, while Archipelago CEO Jerry Putnam will become one of the new body's co-presidents, along with current NYSE Co-Presidents Catherine R. Kinney and Robert G. Britz.

Although the NYSE will move into electronic trading with the merger, the deal will not eliminate floor trading, Thain emphasized. Instead, investors will be able to conduct transactions via the floor, electronic trading via Archipelago or through the Big Board hybrid marketplace. Still in development, hybrid trading at the NYSE would rely on floor traders generally at times of high volatility or low liquidity.

Critics have charged that floor traders are inefficient, don't always give investors the best price and put their own interests ahead of investors'. Last week, for instance, federal prosecutors indicted 15 current or former NYSE traders, or specialists, on charges of securities fraud, and the SEC filed civil charges against those traders and five more. Meanwhile, the NYSE, to settle charges that it had inadequately policed floor traders, agreed to set aside $20 million to pay for future audits of its regulatory division.

While recognizing a need for change, the NYSE has defended its system, noting that floor traders fill a critical need by being the buyers or sellers of last resort for stocks.

While the merger won't thrust the NYSE completely into the world of electronic trading, it will address some of the outstanding criticism of the exchange that came to light in the Grasso pay scandal. Among the reforms suggested in the wake of that episode was that the NYSE should separate its exchange from its regulatory powers and that the Big Board should de-emphasize the role of the floor traders.

Investors have long had a problem with the NYSE's exchange and regulatory body being part of the same organization, says Pat McGurn, special counsel at proxy adviser Institutional Shareholder Services. The NYSE changed its structure in 2003, so that the regulatory division no longer reported to the CEO, but to a chief regulatory officer that reported to the board. Still, even with those changes, the feeling among investors was that the exchange faced a conflict, McGurn says, between policing listed companies and looking after its own commercial interests in ensuring that as many companies are listed as possible.