NYSE to Acquire Rival Stock Exchange
The New York Stock Exchange, the citadel of America’s financial markets for 212 years, unveiled plans Wednesday for a historic transformation, saying it would buy a rival exchange to usher in a new era of electronic trading.
The deal reflects the lightning-fast changes rippling through global financial markets because of increasingly automated stock trading. But it also threatens to diminish the NYSE’s storied auction-style market, in which human traders joust on its Lower Manhattan trading floor.
“It’s probably the most important decision the NYSE has taken in its entire 212-year history,” said Michael Henry, a partner at Accenture, a New York-based consulting firm.
The Big Board said it would acquire Archipelago Holdings Inc., one of a breed of electronic trading upstarts that have emerged to challenge the dominance of the NYSE and the Nasdaq Stock Market. In another break with tradition, the NYSE announced plans to become a publicly traded company, replacing an ownership system of 1,366 seat holders.
The deal is a bold stroke for John Thain, the NYSE chief executive who last year set out to overhaul the exchange’s operations and culture after succeeding Richard Grasso. The Big Board has been under pressure from regulators and investors to boost its use of automated trading, and Thain has hatched plans for a hybrid market that would combine computers and human traders.
“It will be good for investors and good for America,” Thain said at a news conference called late Wednesday. “We will be stronger, more diversified and better able to deliver growth and profitability.”
Outside experts were impressed by the plan.
“This is a brilliant strategic move on the part of the NYSE,” said James J. Angel, associate professor of finance at the Georgetown University business school in Washington, D.C.
In one fell swoop, he said, the NYSE would absorb an up-and-coming competitor and acquire its technology, put greater pressure on Nasdaq and -- by going public -- become more nimble.
The latter move, Angel said, “gives the NYSE the flexibility to turn in whatever direction competition requires” without having to seek approval from hundreds of seat holders.
There would be little immediate effect on the trading public, said USC finance professor Lawrence E. Harris, former chief economist for the Securities and Exchange Commission. Most retail brokerage clients buying and selling NYSE stocks already have their trades executed electronically, he noted.
The swarm of traders and specialists on the NYSE floor -- archaic as it may look -- “still accomplishes some valuable things that can’t be accomplished by a black box,” Harris said, such as executing large trades for institutional investors with levels of efficiency and confidentiality that often can’t be matched by computers.
The new company would be called NYSE Group Inc. The exchange’s seat holders would own 70% of the new entity, and Archipelago shareholders 30%. Each seat holder would receive stock, as well as about $300,000 in cash, or a total of $400 million, Thain said.
Thain would remain as CEO, while Gerald D. Putnam Jr., Archipelago’s chairman and chief executive, would become co-president alongside the NYSE’s two current co-presidents. The deal is expected to close late this year or in early 2006.
Some analysts said the acquisition appeared to be a good deal for NYSE seat holders, because it would give them cash and a stake in a potentially strong company.
Still, the plan must be approved by the SEC as well as NYSE seat holders and could face opposition.
“This kind of blindsided me,” said William J. Higgins, owner of an NYSE seat and president of the Assn. of New York Stock Exchange Equity Members, an organization representing about 20% of seat holders.
“I got a call from the exchange at 4 p.m. saying an announcement was coming, and that was the first I heard of it,” Higgins said Wednesday night.
Higgins, though noting that he knew little about the plan, said, “It seems like a rich deal for Archipelago. I can’t believe we’re paying 30% of the value of the NYSE for Archipelago.”
Although Archipelago was launched only eight years ago, it has grabbed an estimated 20% market share of trading in Nasdaq-listed stocks on its Archipelago Exchange, or ArcaEx, and has worked furiously to boost its small share of trading in NYSE-listed stocks.
Archipelago shares rose $1.86 to $18.76 on the Pacific Stock Exchange, with much of the gain coming in the last 15 minutes of trading, after word of the deal had leaked out. As of Wednesday’s close, the total value of its shares was $884 million.
One way to value the NYSE would be to multiply the most recent price for a seat -- $1.62 million -- by 1,366 seats, or $2.21 billion. Thus, the combined company could be valued at just under $3.1 billion.
Archipelago gained traction in 1998 and 1999 with major equity investments from Wall Street firms such as Goldman Sachs Group Inc. The capital from its big partners enabled the upstart network to develop cutting-edge technology that helped Archipelago pull ahead of other electronic trading networks, or ECNs, and start biting into Nasdaq’s market share.
In January, Archipelago announced an agreement to buy PCX Holdings Inc., parent of the Pacific Stock Exchange, for $50 million, giving it access to the regional market’s options trading business.
The NYSE deal could put added pressure on Nasdaq, which reportedly is in talks to acquire Instinet, another electronic trading firm. Nasdaq spokeswoman Bethany Sherman, however, said the NYSE was simply following Nasdaq’s lead.
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Archipelago Holdings
* Founded: 1996
* Headquarters: Chicago
* Major business: Operates the Archipelago Exchange (ArcaEx), an electronic trading system that searches across markets for the best buy or sell price.
* Employees: 234
* Chairman/chief executive: Gerald D. Putnam Jr.
Source: Company reports
Los Angeles Times
