NYSE Goes Public, Goes Electronic

''It is clear that we must do more,'' says the Big Board's chief executive, John Thain.
Stephen TaubApril 21, 2005

Acknowledging that computerized trading of stocks is the future, the New York Stock Exchange and the Archipelago Exchange, one of the largest electronic exchanges, have agreed to merge into a new entity called NYSE Group Inc., instantly becoming a publicly held company.

The merger is the largest ever among securities exchanges.

“It will be good for investors and good for America,” said John Thain, chief executive officer of the NYSE, at a press conference. In a statement, he added: “As we look to the future and to the challenge of competing globally in a high-speed electronically connected world, it is clear that we must do more. This transaction will mean we will be more diversified and transparent, and better able to compete, grow and serve our customers.”

“This combination benefits investors by providing a stronger and broader platform for trading and strengthens our abilities to expand into new products and services,” said Jerry Putnam, CEO of Archipelago, in a statement.

The announcement came less than two weeks after the Securities and Exchange Commission passed the “trade-through rule,” which requires that all investor trades be executed at the best price, even if stock markets must fill the order through a competitor. As we reported in December, however, the NYSE may have a tricky balancing act as it makes a transition to a more hybrid electronic and floor-trading specialist execution model as prescribed by the SEC.

The deal did not come without controversy. Several members of the venerable, 212-year-old NYSE have questioned its need to relinquish 30 percent of its ownership to gain access to an electronic system rather than develop such technology itself. Very likely, the NYSE felt pressured by the Nasdaq Stock Market, which is reportedly in negotiations to buy Instinet Group Inc.’s electronic-trading business. It had been rumored, in fact, that the Big Board would make a bid for Instinet itself.

The deal is described as a reverse merger. The NYSE and Archipelago will be combined in a “stock for membership” deal. NYSE members will receive consideration in the form of cash and stock in the new company; Archipelago shareholders will receive stock. Current shareholders of Archipelago will hold 30 percent of the shares of the newly created NYSE Group, and current NYSE owners will hold 70 percent.

Three independent Archipelago directors will join the existing 11 independent New York Stock Exchange directors on the board of the new entity. Thain will become chief executive officer; Putnam will join the Big Board’s Catherine R. Kinney and Robert G. Britz as NYSE Group co-presidents. Amy Butte, currently the chief financial officer of the NYSE, will become executive vice president of strategy and product development; Archipelago finance chief Nelson Chai will be the CFO of the newly created company.

Regulation of the NYSE Group will be conducted by a separate non-public, not-for-profit entity governed by a chief regulatory officer and a board made up of the independent directors, and funded by dedicated regulatory fees and long-term regulatory service contracts.

The transaction is subject to approval by members of the NYSE and shareholders of
Archipelago; it also awaits approval by the SEC as well as the expiration of the applicable Hart-Scott-Rodino waiting period. The merger is expected to close in either the fourth quarter of 2005 or the first quarter of 2006.