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Wednesday’s announcement by New York Stock Exchange CEO John Thain that the Big Board will merge with Archipelago Holdings Inc. marks a historic shift in the world of stock trading. But it also raises some significant questions regarding issues ranging from market oversight to cultural compatibility. The deal, described by some analysts as “stunning,” will remake the 213-year-old NYSE, now a privately held, nonprofit company, as a publicly listed, for-profit concern better able to compete with its quickly rising electronic rivals. The merger “will also enhance the depth and resilience of America’s capital marketplace by bringing together the strength of NYSE’s auction market and the speed and entrepreneurialism of Archipelago,” Thain said in a prepared statement announcing the merger. There is some concern about how the new NYSE Group will be regulated. The plan is for a separate, nonpublic, not-for-profit entity run by a chief regulatory officer — a job now held at the NYSE by former SEC and Nasdaq official Richard Ketchum — and overseen by a board that will include NYSE Group’s independent directors as well as unaffiliated directors. Donaldson said the SEC wants to be satisfied that the not-for-profit regulatory arm will be adequately funded. “Culture shock” may also be an issue, said Jodi Burns, a senior analyst with financial consulting firm Celent Communications LLC. The NYSE runs a tight, hierarchical ship, while Archipelago has an open trading environment and a more egalitarian environment. “It’s hard to imagine how this company is going to be run,” she said. Antitrust issues aren’t expected to be significant, though regulators at the Justice Department are going to take a look at the deal. “This has business ramifications, even for Republicans,” said a former Justice Department official. “There is going to be some yelling and screaming. The NYSE as a private, profit-making company — if something goes wrong, it could bring our American economy to a halt.” Two major factors are likely to ensure approval of the deal by the department’s antitrust division, said the antitrust lawyer reviewing the deal. First, the SEC oversees the NYSE’s internal regulators carefully enough to allay concerns about price increases. In addition, there is always the possibility of additional competitors entering the market. “This is a heavily regulated market,” the lawyer said. “The SEC is forcing competitors to pass a deal to a market with a better price. That’s not the kind of place where antitrust regulators really have to get involved.” The deal was announced on the heels of speculation about a merger between Nasdaq Stock Market Inc. and Instinet Group Inc., a competing electronic trading system which like Archipelago has about 25 percent of over-the-counter trading. But that is not a done deal. What’s more, regulators are expected to be sympathetic because of concerns about overcapacity in the industry. Among other issues is Goldman, Sachs & Co.’s role as adviser to both NYSE and Archipelago, a highly unusual arrangement these days. A Goldman team led by David Schwimmer brokered the deal and advised both sides. Goldman owns about 16 percent of Archipelago and helped take it public last year. Goldman and a subsidiary, market maker Spear, Leeds & Kellogg Specialists LLC, owns seats on the exchange, which are to be converted into shares in the new entity. Thain is a shareholder in the firm and a former Goldman co-president. “I can’t think of a deal where an investment bank has more points of contact with the transaction,” says John Coffee, professor of law at Columbia Law School and director of the university’s center on corporate governance. Coffee, though, described NYSE as a “consenting adult” that waived Goldman’s conflicts. Copyright �2005 TDD, LLC. All rights reserved.

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