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A little more than two centuries ago, 24 brokers and merchants signed an agreement under a buttonwood tree on Wall Street, laying the groundwork for what was to become the New York Stock Exchange Inc. On Tuesday, that all changed as the exchange’s 1,366 owners voted to trade in their history and embark on a new era. The overwhelming vote — 90 percent of members cast a ballot — to purchase Chicago-based electronic upstart Archipelago Holdings Inc. transforms the world’s largest stock market from a nonprofit public utility into the NYSE Group Inc., a for-profit, publicly traded company. The deal arms the Big Board with publicly traded shares, a currency needed to make acquisitions in its quest to stay competitive in what is increasingly becoming a global stock-trading business. It also allows the exchange to make swift decisions without waiting for a consensus among its members and the ability to pursue sources of faster-growing revenue. It was widely expected that the vote would pass easily, especially after a small group of seatholders settled a civil case brought in New York State court in which they argued the deal’s terms were not only unfair to the exchange members but also riddled with conflicts of interests. Goldman Sachs Group Inc. advised both sides on the deal and has a 15 percent ownership stake in Archipelago. The new company will have the capability to not only trade stocks listed at the NYSE, but also Nasdaq-listed and over-the-counter stocks through Archipelago’s all-electronic trading system. The deal will also increase the exchange’s market share in exchange-traded funds and derivatives trading. Harrell Smith, manager of the securities and investments group at financial consulting firm Celent Communications LLC, said Archipelago’s newly revamped options trading platform provides the NYSE with an entr�e to the world of options trading, which has seen explosive growth over the past several years. “This merger is indicative of the inevitable shift of equities trading to electronic exchanges, as well as the extent to which exchanges are seeking out additional asset classes to drive future revenue growth,” Smith said. But while the deal brings new trading technologies to the NYSE, the future of the floor remains one of the biggest unanswered questions. The two marketplaces are expected to be kept separate, but many traders and brokers are concerned over how the combination of Archipelago’s trading technology with the NYSE’s floor-trading model will fare. The NYSE is also preparing to make its own trading more automated, although the floor will remain an important part of the NYSE. However, the Independent Broker Action Committee, a not-for-profit alliance of NYSE floor brokers, said Tuesday they have some trepidation over the exchange’s plans for the “so-called Hybrid Market Initiative.” The brokers say the hybrid market, which will offer customers a choice between automated trading or the auction market, is currently unacceptable in achieving that end as it currently stands. “We don’t know how the floor will transform itself, and we have concerns about how the merger will play itself out when it comes to preserving the balance between the brokers and specialists and the ability for the investing public to get the best price and execution,” said Marc Powers, an attorney with Baker & Hostetler who represents IBAC. Powers added that the group would be submitting their comments on the hybrid market to the Securities and Exchange Commission. The SEC has not yet approved the NYSE’s hybrid market proposal. As a public company, the NYSE will also have to face the controversial issue of how as a for-profit company it will police itself — enforcing listing standards and regulatory rules. The NYSE has said its regulatory arm, NYSE Regulation, will operate independently as a not-for-profit unit, with some funding coming from outside the new combined company, NYSE Group Inc. Current NYSE members will own 70 percent of the new public company, which is valued at about $9 billion. It will trade under the symbol NYX, with Archipelago shareholders getting the rest. The Securities Industry Association, a Washington-based advocacy firm, says this is the perfect opportunity for the NYSE and NASD to come together to cut down on regulatory redundancies. “Today’s vote represents an opportunity to reduce regulatory duplication between the NYSE and NASD, eliminating inefficiencies that consume time, energy and money and which inhibit innovation and growth.” With the vote of NYSE members and Archipelago shareholders successfully cleared, the exchange still needs approvals from the SEC and is expected to close the deal in mid-January. Copyright �2005 TDD, LLC. All rights reserved.

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