NYSE to acquire Archipelago

Talk about major stories! The NYSE has announced plans to acquire the Archipelago stock market!

With the NYSE losing marketshare to ECNs, it has long been speculated as to what the Big Board's response would be. It appears that this is it!

From the NY Times:

"The New York Stock Exchange, whose shouting traders and frenzied activity have become a global symbol of capitalism, announced yesterday that it would acquire a leading electronic trading system in a deal that allows the exchange to become a public company but casts doubts on its 213-year-old system of auction trading.

The exchange will merge operations with Archipelago, one of the biggest electronic trading operators, to form the NYSE Group. The deal will give the holders of the exchange's 1,366 seats $400 million in cash and 70 percent of the shares of the combined publicly traded company.....

The merger is the most significant acknowledgement yet that the Big Board's traditional market, driven by human traders, may not be able to survive in an era increasingly dominated by instantaneous trades."

From the San Francisco Chronicle:

"By merging with Archipelago Holdings and morphing into a for-profit, publicly held company, it vastly increases its electronic trading capabilities at a time when its customers and regulators are demanding it.

It will add or expand trading opportunities in products like options, exchange-traded funds and Nasdaq stocks, thus increasing its slow-growing revenues, dominated by trading in NYSE-listed stocks.

It also gives NYSE members a new way to cash in on the value of their seats."

From Bloomberg:

"When New York Stock Exchange Chief Executive Officer John Thain arranged the takeover of Archipelago Holdings Inc., a nine-year-old electronic exchange, by the 212-year- old Big Board, he pulled ``a rabbit out of his hat.''

That's the view of William Harts, who worked for the NYSE's chief rival, the Nasdaq Stock Market Inc. In one stroke, the NYSE will be able to extend its operating hours, provide clients with options trading and access to Nasdaq-listed stocks, and cut about $200 million of expenses.

For the NYSE, the transaction is a ``a giant step toward eliminating their massive infrastructure costs by adopting Archipelago's technology....

The new entity plans to cut costs during the next two years by reducing staff and consolidating operations. Thain said he will preserve the NYSE's Wall Street trading floor, where specialists make markets in shares of some of the largest U.S. companies.

Thain said there would continue to be a role for floor traders. While the top few hundred of the NYSE's largest companies, such as General Electric Co. and International Business Machines Corp. trade seamlessly electronically, he said smaller companies benefit from human intervention.

``This is absolutely not the end of the floor,'' Thain said."

From the Washington Post:

"Thain and Archipelago chief executive Gerald D. Putnam, who would become co-president of the new company, said the combination would significantly improve the NYSE's competitive position in a long-fragmented business that appears to be quickly consolidating.

The Nasdaq Stock Market Inc., for instance, is widely expected to complete a deal soon to buy Instinet Group Inc., another large electronic trading network. Nasdaq also has long considered an initial public offering of its own but has not managed to complete a deal."

Interestingly, this past fall on our Finance Club trip to NYC we spoke with representatives at both NYSE and Nasdaq who had largely predicted more consolidation. On official in fact went as far as to imagine a world with a single market. While the regulations and governance of such a market causes some pause, the consolidation wave continues!

Is this a case of "If you can't beat them, join them?" Or is it being driven by economies of scale? or something else entirely? CBS Marketwatch has a very interesting series of interviews with analysts on the deal. Most are very favorable. Thus it is not surprising that
Archipelago shares jumped (about 68%) in the hours after the announcement.