New NYSE Group Inc. begins trading


BOSTON -- The highly anticipated marriage of the New York Stock Exchange and Archipelago Holdings Inc. consummated this week, and the stock began trading yesterday, but Wall Street analysts worry that a high share price and regulatory hurdles might mar the honeymoon.

The merger of the Big Board and electronic exchange Archipelago creates a public company, NYSE Group Inc., which is 70 percent owned by NYSE seat-holders with the remaining 30 percent going to Archipelago in a substantial change from the exchange's 213-year history as a member-owned body.

Since the shares of the new company are converted shares of Archipelago, it's possible to gauge analysts' sentiment on the stock by reviewing their take on Archipelago shares.

Of the six analysts polled by Thomson First Call, three had a hold rating on Archipelago stock and three rated the shares "underperform."

Meanwhile, the average target price on the stock was $43 a share, while Archipelago stock traded in the $65 range Tuesday afternoon.

Shares of NYSE Group gained $15.75, or 25 percent, to close at $80 yesterday on their first day of trading.

"We believe that shares reflect significant optimism about the future of the combined NYSE/Archipelago model, and ... challenges will only become apparent as the hybrid system and Regulation NMS are implemented during 2006," wrote Raymond James analyst Michael Vinciquerra in a March 1 research note.

"The lack of information and liquidity in the shares today has allowed speculators to push the valuation to unreasonable levels," said Vinciquerra, who rates Archipelago shares underperform.

Regulation NMS, or National Market System, is a Securities and Exchange Commission rule intended to ensure that Wall Street firms fulfill stock trades at the best available price. The rule is expected to increase trading volume because stock traders are required to accept the best price available for a stock trade, regardless of which exchange or market posts them.

The regulation was seen as a driving force behind the NYSE and Archipelago merger to create a "hybrid" structure that combines the Big Board specialist system with Archipelago's electronic exchange.

Some analysts see "regulatory meddling" as a major risk for NYSE Group's revenue and business model.

For example, before approving the merger, the SEC required that the Big Board create NYSE Regulation Inc., a not-for-profit subsidiary, to perform regulatory responsibilities.

Regulator NASD also recently spurned NYSE Chief Executive Officer John Thain's idea to create a joint venture to regulate broker firms, saying the exchange's plan to go public creates a conflict of interest, according to media reports.

"The tug-of-war with regulators over the [NYSE Group's] public service role, plus SEC regulation of trading rules and revenue structures, will put a damper on attempts to maximize shareholder value, limiting potential upside," wrote Morningstar Inc. analyst Philip Guziec in his latest analysis of Archipelago.

Guziec added that he sees NYSE Group capturing about 50 percent market share of the U.S. execution business, although the risk is that revenue could be squeezed if exchange competition leads to pressure on listing fees and transaction prices.

As a result, Thain has hinted that the exchange might explore branching out into bond and options trading.

The Pacific Stock Exchange, which was acquired by Archipelago early last year, brings a foothold in the options market.

Still, some are skeptical of the plan to trade multiple assets in one consolidated entity like NYSE Group.

"It's certainly something they can do and there are savings involved, but the extent of the savings is the longer-term question because I'm not sure whether you can trade everything on one platform," Rich Repetto, an analyst with Sandler O'Neill & Partners, said in an interview this week.

Finally, analysts expect the share price of NYSE Group could be volatile, reflecting the fickle nature of U.S. equity transaction volume.

"Just as the brokerages are often a harbinger for things to come in the financial sector, the exchanges will probably fit into that equation of forward-looking financial sector indicators, and they'll revolve around the volume trends," said John Augustine, chief investment strategist for Fifth Third Asset Management.

Repetto added that the new entity will be a "highly watched and highly traded financial stock just because it's the NYSE, and also because the exchange space in general has gotten dramatic interest from investors."

The merger "makes strong strategic sense, but the biggest issue is if they can live up to the expectations that are implied in the valuation and the stock price," he added.

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