A New Era

December 19, 2005

After a landslide vote by NYSE seat holders vote overwhelmingly favored the merger with Archipelago, the Big Board's deal, together with the Nasdaq/Instinet merger appear poised to permently alter global market structure.

In the end, it wasn't even close.  Despite lawsuits, accusations of insider dealings, and concerns about ending a 200-year old tradition, members of the New York Stock Exchange (NYSE) voted overwhelming on December 6 in favor of a plan to merge the Big Board with the electronic trading network Archipelago.

Nostalgia about the old Buttonwood Tree couldn't distract members from the economics of the deal; seats on the NYSE rose from just $975,000 before the deal was announced to $4 million on the eve of the vote. 

Faced with those numbers, and hopeful for the future, more than 95 percent of seat holders voted in favor of the plan.  The landslide victory echoed a similar vote by Archipelago shareholders earlier this year.  Assuming no last-minute snags, the deal will be finalized in early 2006. 

"This is a truly historic day for the New York Stock Exchange and an event of great importance for our future and that of our customers and America's capital markets," said NYSE CEO John A. Thain.  "In approving the merger with Archipelago, our Members have embraced an initiative that enables the NYSE to maintain our leadership position and to advance our goal of becoming a global multi-product marketplace." 

As a result of the deal, the NYSE and Archipelago will emerge as a new, publicly-traded, for-profit company called the NYSE Group.  The new "Big Board" will combine the NYSE's well-established specialist system with Archipelago's expertise in electronic trading into a new "hybrid" trading system.  The NYSE got a jumpstart on this new system on December 14, when it rolled out a own pilot hybrid program for 168 test securities. 

The group will make the NYSE a for-profit company for the first time in its 200+ year history.  The Big Board didn't waste any time adapting to this new reality, announcing plans on Wednesday, December 14, to lay off 60 members of its exchange group.  The NYSE called it a "cost-cutting measure."

Investors have taken a "sell the news" mentality to the NYSE vote.  Seats on the exchange traded hands for a record $4 million shortly before the vote, but have since fallen back to just $3.3 million. Archipelago shares - which trade as a proxy for the value of the entire group - have followed a similar path. Shares fell from $60/share before the vote to $50.90/share after.  Don't cry for Archipelago shareholders, however - they're still up 200 percent on the year.

NYSE seat holders will receive a combination of cash and Archipelago shares in exchange for their seats.

The merger will have major repercussions for the exchange-traded funds (ETF) industry - an area the NYSE has aggressively targeted for growth. In fact, some say that a desire to compete more fully for the listing and trading of ETFs was a driving factor behind the deal. 

The hybrid model could prove very attractive to ETF designers looking for a listing venue, as Archipelago's nimble electronic trading system will make for easy arbitrage, while the NYSE's specialists helps ensure liquidity for new (and often thinly-traded) ETFs.  The prospects of this hybrid power are thought to have played a significant role in Barclays Global Investors' decision to transfer the listings for its popular iShares funds from the American Stock Exchange (AMEX) to the NYSE earlier this year.

The AMEX recently rolled out its own hybrid trading system in an attempt to keep up.  The battle for listings will between these two exchange giants will be huge.

On the flip-side, by purchasing Archipelago, the NYSE brings the single largest share of ETF trading to its own doors.  Investors can trade ETFs on any exchange under the Unlimited Trading Privileges (UTP) system, and the bulk of trading had long since moved off of the NYSE and AMEX and onto electronic networks like Archipelago and Island.

Meanwhile, seat holders aren't the only ones celebrating on the NYSE - anyone who owns shares on the Big Board should be cheering as well.  The NYSE Composite Index, a measure of all the stocks listed on the Big Board, touched a new all-time high recently, up 10 percent on the year.


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