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Two Plus Two Equals What?

Both Instinet and Archipelago are ECNs, fully automated computer networks that match stock buyers and sellers and do not use market makers to match orders.

"We are talking about an order of magnitude change" in the structure of the stock market, said Robert A. Schwartz, finance professor at Baruch College-City University of New York. "This is taking us to an unknown place and the ramifications are very hard to think through."

Investors' Good News

Harold S. Bradley, a senior executive at mutual fund firm American Century Investment Management, is among those delighted by the mega-mergers and the quickening trend toward more electronic trading.

A longtime critic of the trading floor-based model, Bradley said that currently, if he wants to sell a million shares of stock on the NYSE, he has to carve his order into small pieces to prevent other market participants from recognizing that a big chunk of stock is trying to move and using that information (which can temporarily depress a stock's price) before he can finish selling.

In an electronic system, Bradley said, he could instantly and anonymously execute one big trade. Over the course of a year, he said, not having to execute scores of small orders or "expose" big orders to the marketplace -- meaning that investors get a chance to bid on pieces of a big block -- could save his firm $100 million or more.

"That's $100 million that, instead of going to some unwanted intermediary, goes back to my investors," said Bradley, whose firm owns a stake in Archipelago.

In addition, Bradley said he thinks the current floor-based system allows professional market players, such as hedge fund managers, to pick up tidbits from floor traders about big, pending institutional stock orders, something that would be impossible in a fully automated system.

He said he also thinks a publicly traded NYSE would create incentives for the exchange to worry about pleasing customers first (principally big institutions like his), rather than about maximizing profits for a small, private group of seat owners. The NYSE currently is owned by these seat-holders. Even though the exchange is a not-for-profit, seats are tradable, with profits on their sale going to their owners. "All of a sudden you will have broken this really unhealthy structure," he said.

George U. "Gus" Sauter, chief investment officer at mutual fund giant Vanguard Group, said the deals would create a highly competitive dynamic between two big marketplaces, reducing transaction costs as well as the "spread" between the prices at which people offer to sell stocks and others are willing to pay for them.

"I think the impact on investors could be major," he said. "Transaction costs are largely hidden in mutual fund performance, but they can easily represent a half a percent to 1 percent of total costs."

NYSE Chairman Marshall N. Carter said in an interview that the new NYSE Group Inc.'s ability to offer more investing products in one place could be another way individual investors feel the difference in the post-merger world.

Among other things, the NYSE Group plans to offer exchange-traded funds (ETFs), options and derivatives, many of which are currently traded on other markets such as the International Securities Exchange and the American Stock Exchange.

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