Federal regulators have approved the merger of the New York Stock Exchange with electronic rival Archipelago Holdings Inc. (AX), the final hurdle in a market-shaping deal that will transform the 213-year-old Big Board into a for-profit company.
The Securities and Exchange Commission on Monday announced its approval of the $9 billion transaction, which will give the NYSE — already the world's biggest stock exchange — new, high-tech trading capabilities and an estimated 49 percent of the market in stock trading.
The deal won approval late last year from the Justice Department, NYSE seat owners and Archipelago shareholders. The merger is scheduled to close on March 7.
"The evolution of our major exchanges into for-profit, publicly traded companies that compete on a global basis will require increasingly vigorous and vigilant regulation," SEC Chairman Christopher Cox said in a statement. "The (SEC) has worked with the NYSE ... to adopt changes in the proposed regulatory structure for the combined entity that will increase the independence of regulation and oversight."
Revelations of allegedly widespread violations by trading firms at the NYSE, along with a scandal in late 2003 over the $188 million pay package of its former chairman Richard Grasso, called into question the long-established system of self-regulation by the exchanges — in which they are responsible for policing their traders and the SEC oversees the exchanges themselves.
Among the changes agreed to by the NYSE: a majority of members of the exchange's board has to be independent of management, and the board's committees — including those that set compensation for exchange officials — has to be fully comprised of independent members.
The NYSE, with its floor auction system of human traders, has been under heavy competitive pressure from all-electronic rival the Nasdaq Stock Market and other electronic trading platforms in the past decade. While the exchange prides itself on its auction system, which helps reduce price volatility, modern stock traders have been drawn to Nasdaq's transaction speeds — where a price difference of a penny can mean thousands of dollars made or lost.
Nasdaq bought Instinet Group Inc.'s electronic network last year for $1.88 billion.
The NYSE-Archipelago merger will create a new publicly held corporation, NYSE Group Inc., with the exchange and Archipelago becoming divisions of the company. The new stock will be listed on the NYSE as NYX on March 8, a day after the deal closes.
"This will mark the beginning of a new era for the exchange and America's financial markets," the NYSE's chief executive officer, John Thain, said in a statement. The newly shaped exchange "will be better positioned to grow, create value and compete globally," he said.
As a result, investors will benefit from choices in trading, advanced technology and a wider group of companies whose stock can be traded, Thain said.
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 electronic trading system. The deal also increases the exchange's market share in exchange-traded funds and derivatives trading.