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NYSE, electronic rival to merge

Deal transforms Big Board into for-profit venture

NEW YORK -- The 213-year-old New York Stock Exchange vaulted into the top ranks of electronic stock trading yesterday, unveiling a merger with all-electronic rival Archipelago Holdings Inc. in a stunning move that will also transform the NYSE into a for-profit, publicly traded enterprise.

The NYSE, famous around the world for its busy trading floor, says it has no intention of becoming an entirely computer-based exchange. Instead, by offering a fast electronic option alongside the slower but less volatile floor-based operation, the NYSE hopes to effectively compete with its chief US rival, the Nasdaq Stock Market Inc., and tackle increasing global competition.

''This is an essential step to maintaining our global competitiveness and leadership," NYSE chief executive John Thain said. ''I believe that the combination of Archipelago and the New York Stock Exchange will be the leading securities market in the United States and in the world."

Still, the merger does move the NYSE in the direction of all-electronic trading.

The NYSE's 1,366 seat holders, its current owners, will receive $400 million in cash and 70 percent of the shares in the new company, while Archipelago's shareholders will retain 30 percent of the shares, Thain said at a news conference.

Using the value of the NYSE's latest seat sale -- $1.62 million -- as a guide, the NYSE is roughly valued at $2.2 billion. Archipelago is valued at $844 million using yesterday's closing stock price.

The new entity, a holding company to be called NYSE Group Inc., will spin off the NYSE's regulatory arm -- recently invigorated after coming under intense criticism for failing to stem a floor-trading scandal -- into a not-for-profit oversight entity. That part of the deal answers the demands of some NYSE members who have been agitating for the exchange to turn for-profit to better compete as a business.

Archipelago chairman and chief executive Jerry Putnam said the merger would create new opportunities for NYSE Group to expand its trading into other areas, including options and other equity derivatives. The exchange will not trade Nasdaq-listed stocks on the floor of the NYSE, but will continue to trade them through ArcaEx's electronic market.

The merger also improves the NYSE's ability to compete following the Securities and Exchange Commission's approval this month of a Regulation National Market System. The regulation requires stock traders to accept the best bid or offer available, no matter which stock exchange or market posted it -- but customers could go to another market if they want to complete trades as quickly as possible.

Thain will remain chief executive of NYSE Group, while Putnam will become president and co-chief operating officer. The management teams of the two companies will be integrated, Thain said, and a transition team is already working on the deal. NYSE chief financial officer Amy Butte will become executive vice president of strategy and product development, while Archipelago finance chief Nelson Chai will assume that role for the NYSE Group.

Pending regulatory approval, the merger is expected to be completed in either the fourth quarter of this year or the first quarter of 2006, Thain said.

Three ArcaEx board members will join the NYSE board. The company will continue to be headquartered at its iconic Wall Street building in New York.

Chicago-based Archipelago trades both stocks and options based on stock holdings. Archipelago handles about 25 percent of the trades in stocks listed on the Nasdaq, but has made little impact in handling NYSE stocks.

Both the NYSE and Archipelago reported their first-quarter earnings alongside the merger news.

The Big Board's quarterly net income more than doubled, rising to $24.9 million from $11.5 million in the first quarter of 2004.

ArcaEx's earnings remained flat year-over-year, with quarterly profits of $21.9 million, or 55 cents per share, though since the electronic exchange went public on Aug. 16, 2004, it did not have to pay corporate taxes in the year-ago period.

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