The 213-year-old New York Stock Exchange (search) vaulted into the top ranks of electronic stock trading Wednesday, announcing a merger with all-electronic rival Archipelago Holdings Inc. (AX) in a stunning move that will also transform the NYSE into a for-profit, publicly traded enterprise.

The NYSE, famous around the world for its busy trading floor, says it has no intention of becoming an entirely computer-based exchange. Instead, by offering a fast electronic option alongside the slower but less volatile floor-based operation, the NYSE hopes to effectively compete with its chief U.S. rival, the Nasdaq Stock Market (search), and tackle increasing global competition.

"This is an essential step to maintaining our global competitiveness and leadership," NYSE Chief Executive John Thain (search) said. "I believe that the cominbation of Archipelago and the New York Stock Exchange will be the leading securities market in the United States and in the world."

Still, the merger does move the NYSE in the direction of all-electronic trading.

The NYSE's 1,366 seat holders, its current owners, will receive $400 million in cash and 70 percent of the shares in the new company, while Archipelago's shareholders will retain 30 percent of the shares, Thain said at a news conference.

Using the value of the NYSE's latest seat sale — $1.62 million — as a guide, the NYSE is roughly valued at $2.2 billion. Archipelago is valued at $844 million using Wednesday's closing stock price.

The new entity, a holding company to be called NYSE Group Inc., will spin off the NYSE's regulatory arm — recently invigorated after coming under intense criticism for failing to stem a floor-trading scandal — into a not-for-profit oversight entity. That part of the deal answers the demands of some NYSE members who have been agitating for the exchange to turn for-profit in order to better compete as a business.

"I think the regulatory structure we're proposing will be a model for other self-regulating agencies," Thain said.

ArcaEx Chairman and CEO Jerry Putnam said the merger would create new opportunities for NYSE Group to expand its trading into other areas, including options and other equity derivatives. The exchange will not trade Nasdaq-listed stocks on the floor of the NYSE, but will continue to trade them through ArcaEx's electronic market. The NYSE also will continue its plan to create a hybrid market, combining its floor trading with an enhanced electronic system under development.

The merger also improves the NYSE's ability to compete following the Securities and Exchange Commission's approval earlier this month of Regulation National Market System. The regulation requires stock traders to accept the best bid or offer available, no matter which stock exchange or market posted it — but customers could go to another market if they want to complete trades as quickly as possible. This option makes the pre-merger NYSE less competitive.

Thain will remain CEO of NYSE Group, while Putnam will become president and co-chief operating officer. The management teams of the two companies will be integrated, Thain said, and a transition team is already working on the deal.

NYSE Chief Financial Officer Amy Butte will become executive vice president of strategy and product development, while Archipelago CFO Nelson Chai will assume that role for the NYSE Group.

Pending regulatory approval, the merger is expected to be completed in either the fourth quarter of this year or the first quarter of 2006, Thain said. Three ArcaEx board members will join the NYSE board. The company will continue to be headquartered at its iconic Wall Street building in New York.

Officials with both exchanges, in a conference call with investors, said the combined company could see $100 million in savings this year and next, plus another $100 million in 2007.

The deal is a major coup for Thain and a boost for a stock exchange that in recent years has been most notable for the controversy over the $187.5 million pay package given former Chairman and CEO Richard Grasso. Thain became CEO in early 2004, several months after Grasso's forced resignation.

The move should mollify many of the exchange's seat holders, who had saw their seats decline to $975,000 in value earlier this year from $2.65 million in 1999. Some of the decline has been attributable to the uncertainty of the stock market during that time, but the increasing competition facing the NYSE has likely been a factor as well.

"I knew this is where they had to go. What surprises me is that they did it so quickly and in this format, but I'm pleasantly surprised," said Tom Caldwell, chairman of Caldwell Asset Management Inc. and a seat holder and frequent critic of the NYSE. "I'm going to have to find someone else to fight. I haven't seen enough to have had any concerns, but this is a very interesting deal, and I'm glad John Thain caught on to the vision we had for the exchange."

Thain said executives from both companies will meet with NYSE members and traders after Thursday's trading session to discuss the merger in more detail. Though the NYSE Group Inc. is expected to remain faithful to the floor-trading system, market forces — which have already led the NYSE to attempt its hybrid electronic model — could continue to push for more electronic transactions.

Chicago-based Archipelago trades both stocks and options based on stock holdings. Archipelago handles about 25 percent of the trades in stocks listed on the Nasdaq, but has made little impact in handling NYSE stocks, where more than 80 percent of listed stocks trade on the floor of the exchange.

With the Nasdaq reportedly in talks to acquire Instinet, another electronic exchange owned by Reuters Group PLC, the stage is set for the NYSE and Nasdaq to compete head-on in the U.S., while also giving the NYSE Group a stronger global standing, according to Vincent Phillips, chief executive of Schwab's CyberTrader subsidiary.

"I think this will be great for retail investors and institutions, because you know the NYSE and the Nasdaq are going to compete very aggressively," Phillips said. "Yes, it reduces the number of players in equity markets. You'd rather have 10 really large players instead of two, but I think the benefits will outweight that concern."

The move also gives the NYSE the electronic component needed to compete with all-electronic exchanges around the globe, most notably London and Frankfurt, said Michael Henry, a partner with the securities industry consulting firm Accenture Capital Markets.

"This is definitely a great move to position the NYSE to be more competitive globally," Henry said. "The NYSE will offer the electronic aspect, but also a compelling human trading system that has kept prices less volatile than on other exchanges. It will be a wonderful experiment to see how that plays out against other global markets like London and Germany."

Shares of Archipelago surged 11 percent, or $1.86, to $18.76 on the Pacific Stock Exchange, a regional exchange affiliated with Archipelago, before trading was halted due to pending news. Shares have traded in a 52-week range between $11.50 and $22.90

Both the NYSE and Archipelago reported their first-quarter earnings alongside the merger announcement. The NYSE's quarterly net income more than doubled, rising to $24.9 million from $11.5 million in the first quarter of 2004. Revenues for the quarter were $287.6 million, up 7.3 percent from $268.1 million a year ago.

ArcaEx's earnings remained flat year-over-year, with quarterly profits of $21.9 million, or 55 cents per share, though since the electronic exchange went public on Aug. 16, 2004, it did not have to pay corporate taxes in the year-ago period. Revenues fell 9 percent to $133.7 million, compared to $146.9 million in the first quarter of 2004.