Two Plus Two Equals What?

The oversight body, dubbed NYSE Regulation, will get a long-term contract (perhaps seven to 10 years at a time) to provide regulatory services to the exchange and will be funded by the fees collected under the contract and for examinations, as well as by fines levied on rule violators.

But some question whether the parent company, under pressure to streamline costs and meet Wall Street earnings estimates, will be inclined to pay what it takes for the regulator to do a good job.

"The regulatory function has to have an unassailable funding source," said Barbara Roper, head of investor protection at the Consumer Federation of America. "And if you look at the directors of a for-profit exchange, they will have a fiduciary duty to shareholders to maximize value. So they would not only have the incentive but perhaps the obligation to give short shrift to any part of the operation that doesn't contribute to the bottom line."

Roper and others also said that both the NYSE and Nasdaq might be tempted to ease the standards they demand of companies whose shares are listed to trade on the exchange as their head-to-head battle to sign up new companies intensifies.

NYSE Chairman Carter acknowledged that his exchange would have to prove to the SEC and Congress that it will not relax standards to beef up the bottom line. "We will have to explain to the SEC and people on Capitol Hill that this structure is the right way to ensure independence and investor confidence, as well as our responsibilities as a regulator," he said. "We have to make sure that we will not go light on regulation as a for-profit organization."

The NYSE's new structure will be similar to Nasdaq's. Nasdaq currently contracts with the self-regulatory organization NASD for regulatory services. The NASD has been criticized in the past as a weak regulator, but its reputation has grown much stronger in recent years under vice chairman and regulatory chief Mary L. Schapiro.

Former SEC chairman Arthur Levitt said he thought the NYSE's new structure would improve the independence of its regulatory arm, not weaken it, by fully removing it from any influence by brokerage and trading firms.

"By breaking up the clublike atmosphere of the member organization and becoming a more democratic, publicly owned company, you take a great step toward more disclosure and greater investor protection," he said.

Several observers also said they did not expect a race to the bottom in standards for listings as competition to sign up new companies heats up between NYSE Group and Nasdaq. Instead, they said, a reputation as a home to well-run companies would be a competitive advantage.

"I don't think any market has ever benefited from a public perception of weak oversight or weak listing standards," said Brandon Becker, a securities lawyer at Wilmer Cutler Pickering Hale and Dorr in the District.

Levitt said the SEC would probably consider joining NYSE Regulation and the NASD to create one umbrella self-regulatory organization. Wall Street, which often complains about overlapping regulation, has lobbied for this change.

Folding all regulation into the SEC is not considered a viable option. The agency is viewed as too removed from day-to-day market operations and inadequately funded to hire the kind of skilled experts needed to keep an eye on sophisticated Wall Street traders.

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."