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Two Plus Two Equals What?

Richard G. Ketchum, a former Nasdaq president and now head of the NYSE's regulatory body, said he thought creating one uber-regulator would be a bad idea because the NASD and the NYSE have different areas of expertise. The NASD, for instance, is responsible for the entire universe of securities dealers, including tiny boiler room operations, while the NYSE focuses more on the biggest brokerage houses.

And he said it is always best to have regulators dedicated to the marketplace they know best. "I think it's always more valuable to have a knowledgeable self-regulator close to the market if you can address the conflicts," he said.

Words of Caution

So if the NYSE-Archipelago merger does pass regulatory scrutiny and no one on Wall Street succeeds in blocking it with an alternative deal (former NYSE director Kenneth G. Langone has been trying to put together a competing bid) , should individual investors consider buying shares of the new venture? What about the merged Nasdaq-Instinet?

Several money managers urged caution. It will take time to see whether the new firms can cut costs, successfully introduce new products and produce robust profits.

Matching buyers and sellers of stocks and other securities is a harshly competitive, low-margin business, and historically neither the NYSE nor Nasdaq has made big money (though of course it has not been the NYSE's purpose to make money for itself).

In the first quarter of 2005, for instance, the NYSE reported revenue of $287.6 million. Of that money, $85.1 million came from listing fees and $44.2 million came from the sale of market data, which becomes more lucrative as trading volume rises. The NYSE's net income was $24.9 million. Archipelago reported net income of $21.9 million for the quarter.

"I would really like to see how they make money," said Obuchowski of Altanes Investments. "The NYSE's cost structure is pretty high, and they have never focused on making money for themselves. This is a big shift, and they are going to have to adjust to start working for shareholders and not just an insular little world of members."

Nasdaq, for its part, reported net income of $12.7 million for the first quarter of 2005, while Instinet recently reported preliminary results for the quarter showing net income of $14 million. (By way of comparison, General Electric Co. reported first-quarter earnings of $4 billion.)

The Home Floor

Beyond all the concerns about regulation, valuation, marketplace competition and the like lies one other big question.

What will it mean if the NYSE floor, the symbolic home of American capitalism, source of millions of photos depicting traders in the throes of euphoria and the depths of despair, goes away? Won't something be lost forever?

"The NYSE has always been baseball, motherhood and apple pie all rolled into one," said Bradley of American Century Investment, an opponent of human traders working on a floor to handle stock transactions. "But it's not really the NYSE that is the envy of the world," he said. "It's the capital-raising process in this country that is the envy of the world."

And there are plenty of people who believe there will continue to be a role for human traders on the floor for years to come, especially in volatile and thinly traded stocks. "We will see a lot more electronic trading and automation in stocks where there is no need for an intermediary," said Sauter of Vanguard. "But where I do see the need for the traditional floor model is for less liquid stocks with wider [fluctuations in price] where you want someone who will take risks and make a market in those stocks. The combination of the two models is really exactly what you want."

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