NYSE ArcaNews: Covering NYSE Arca - The World's Most Innovative Bourse

Turning up the volume

2007-03-02T13:18:00.000-05:00

Another example of the media's nonsense was underscored this morning when John Thain was on a call with Prudential forecaster, Robert Rutschow. Mr. Thain denied the ridiculous rumors that have been perpetuated in the pop media. The usual suspects: Wall Street Journal and CNBC helped perpetuate this nonsense. Meanwhile, while all of this talk about systems issues ensues, there's been a real surge in volume -- and that's good for bidness (maybe not so good for selling papers though).

All of the banter about the cliff dive helping to shake up complacency in the market is interesting to think about. Looking at the VIX and wearing out the term "volatility" is in vogue, and again, if these occasional dips (which have occured in equity markets since they first existed back in 1602) generate increased interest in the equity markets, that's a good thing for NYX in the long run.

Greater demand for market data, increased share volume, and tremendous source of liquidity, are all beneficial byproducts that have been overlooked by the media and the Street's bearish NYX-covering prognosticators.

Getting back. Here's the Dow Jones piece from today about Thain's conversation with Pru.

"NYSE Group's Thain Denies Rumor Of SEC Probe Into Volume

In a conference call with Prudential Equity Group, NYSE Group Inc. (NYX) Chief Executive John Thain denied the Securities and Exchange Commission is investigating the New York Stock Exchange, analyst Robert Rutschow said in a note to clients late Thursday.

The Wall Street Journal reported Friday the SEC is eying the shrinking of the NYSE's floor and whether it affected the Big Board's ability to handle a surge in trading volume such as occurred on Tuesday, according to a person familiar with the matter cited by the newspaper. Shares of the NYSE Group rose 2.5% to $83.78 in recent action."
Source: Dow Jones, Steve Gelsi 3/2/07

Countering Media Marlarky

2007-03-01T13:42:00.000-05:00

Tuesday's global cliff dive certainly spooked many investors, gave the media all sorts of stuff to blab about (nearly every major rag in the US had Tueday's dive featured on the front page), and invigerated forecasters' doubletalk.

The WSJ's Aaron Lucchetti was scribed an article for today's WSJ with the frightening headline, "NYSE's Trading Overload Draws Attention of the SEC." In another one of Lucchetti's "NYSE's nothing to get excited about" articles, he starts the article off by stating, "The New York Stock Exchange's move into the electronic age happened almost overnight. Now the Securities and Exchange Commission is looking into whether it happened too fast and contributed to this week's trading troubles" (Source, Wall Street Journal, 3/1/2007, By: Aaron Lucchetti and Kara Scannell).

In all liklihood, the SEC is probably not going to examine whether the NYSE's incredibly methodical and phased rollout of Hybrid happened to fast. Though Lucchetti might rope readers into his story with such a dramatic claim, the facts, once again, get distorted.

Please see this CNBC piece from yesterday. It's Bob Pisani, a tremendously respectable reporter -- in fact, has had a recent version of the Stock Traders Almanac dedicated to him -- discussing the systems glitch from Tuesday with long-time NYX/AX bear, Charlie Gaspirino. Good ole Charlie belches erroneous information as he tries to explain how Hybrid works. He goes to pontificate about his views on the proper staffing levels for specialist firms.

Pisani takes issue with Gaspirino's nonsense, and actually corrects some of Charlie's malarky. Then this afternoon, Gaspirino tried to dispute what John Thain told CNBC earlier in the day about the eye-popping idea that the SEC is investigating the NYSE. Unfortunately, Pisani wasn't around to keep Charlie, so his rant went unchallenged.

The point to all this is just to point out that the revolutionary changes occuring at the Big Board have many foes in the way of folks that have been steeped in an archaic, members-only, system. I'd truly like to know what Italian-American specialists Charlie spoke to to find out they were offended with the "Vinnie" comments.

No doubt, the huge point drop, the already nervous "here comes a correction" folks, and the timing of Hybrid make for jaw-dropping headlines -- point swings in the near-term voting machine.

Market of Markets

2007-02-28T13:26:00.000-05:00

As Phase IV of Hybrid rolls out and NMS goes into effect next week, it's interesting to flashback to 1998 when the Nasdaq and American Stock Exchanges attempted to merge.

It's interesting to read the quote from the former-CEO of Amex , Richard Syron in the link above. (Incidentally, Mr. Syron now runs Freddie Mac, and Frank Zarb is now a Managing Director and Senior Advisor with private equity firm, Hellman & Friedman). Nasdaq and Amex desired the ability to add value by offering traders a choice of electronic trading or floor-based trading. Here is a Washington Post piece from 1998 that discusses the desire for a hybrid model.

In 1998, NYSE's largest competitors tried to put together what the NYSE has now done successfully. (If you'd like to learn much more about Hybrid, please checkout the NYSE's Hybrid Talk blog).

It's interesting to think about how much things have changed since the roaring 90's. Safe to say that in 1998 it was hard to imagine that the NASD would eventually merge its regulatory arm with the NYSE's SRO, or that the NASD would spin-off the Nasdaq (which it founded in 1971). Also, in 1998, it would've been hard to predict that the NYSE would beat all other exchanges to a Hybrid model, and that it would do so by merging its centuries-old open outcry system, with Archipelago Holdings' sophisticated and revolutionary, ArcaEx.

The NYSE has done it, and this is no small accomplishment.

And, as for fears that yesterday's sell-off (what looks on a chart like a cliff in Aculpolco) was related to Hybrid, consider what Louis Pastina, executive vice president for market development at the NYSE, said about the NYSE's operational issues.

According to a Dow Jones Newswire piece today by Gaston Ceron:

"...Pastina pointed to recent moves of human trading personnel on the trading floor, which affected the way that the NYSE's systems were set up. And while the NYSE had made adjustments for the moves, they weren't enough to properly handle the trading surge that was seen as the Dow Jones Industrial Average suddenly plunged about 200 points around 3 p.m. Tuesday - a problem caused by a computer glitch at Dow Jones & Co. (DJ), the company behind the DJIA and also the publisher of this newswire...

...Pastina said the problems didn't lie with the Hybrid Market's electronic component itself, but with other NYSE systems. "We needed to rebalance the allocation of capacity. We did it last night," he said Wednesday. More work will be done, such as additional testing. "We'll add capacity and disk space where appropriate."

...The knee-jerk reaction by the increasingly electronic trading community to the drop made matters worse, Pastina said. "This was a big trigger," he said. "The computers all kicked off at the same time." For the NYSE, the results were delays. "We wound up queuing," Pastina said."

(Source: Gaston Ceron, Dow Jones Newswire 2/28/07).

JP's at it again

2007-02-27T09:37:00.000-05:00

Enough's been said about JP Morgan's view on NYX. One could see today's blurb from Worthington (the JPM forecaster that covers NYX) about the locked up shares coming from a mile away (scroll down on this page and see the 5th paragraph under 1-23-07's posting here at NYSE ArcaNews titled "Hybrid's in Place" post below).

Remarkably, nothing about Worthington's insight points to anything fundamentally related to the operations of NYX. One day, an forecaster will consider the accretive value that Euronext will add to NYX's operations (and vica versa). That sort of fundamental impact is what ultimatly tips weighing machines.

NYSE Having Options

2007-02-13T13:30:00.000-05:00

While so much media focus seems to center around the equities trading marketplace, there is a quickly growing segment of the capital markets space that necessitates some attention -- that's the options marketplace.

Options are a stock deriviative that trade in a unique area of ExchangeLand and require special permission for investors to use (in the way of signed agreements indicating that the investor has an adequate degree of knowledge of options and margin trading). A few fundamental differences between stocks and options are touched on below.

Like the stock marketplace, options markets have made extraordinary advances over the last couple of years. At the heart of these advances was Archipelago Holdings acquisiton of the Pacific Stock Exchange (pictured above; read about that here).

This stroke of management genious and foresight enabled Archipelago to become the first stock exchange to offer electronic trading for both stocks and options.Though Hybrid gets much attention, the ArcaEx platform for trading options is absolutely a world-class system that offers tremendous benefits. While analysts and pop media rags focus on stock volume ebbs and flows between NYSE and (primarily) NDAQ, there are dramatic developments occuring for NYX in the options section of ExchangeLand, and though NYSE ArcaNews is only a little pocket of the world-wide-super-information-highway-web which is incredibly amateur, NYSE ArcaNews feels obligated to expose this exciting options area.

To be sure the rules between trading options and stocks differ significantly. For one thing, today, options typically trade in nickel increments (compared to stocks that typically trade at penny increments). This means that spreads in options are not nearly as tight as they are in stocks. It also means there is a heck of a lot of money left on the table for market makers to benefit from. Arca was a pioneer as it lead the way tightening the nickel spread to pennies. (You can read about this story from July 2005 here).

Also, rules set forth by Regulation NMS do not exactly apply to options trading (this is what a Wall Street analyst that covers NYX recently told me last Friday). Think college football rules and NFL football rules. The rules are quite similiar in many ways, but their subtle differences make the games exciting in their own ways.

As NYX evolves and continues to execute its entrepenuerial/landscape changing vision, the derivitiave area is an exciting one to watch. With the Euronext merger (and Liffe), NYX will continue to offer best-in-class technology and liquidity, and will likely develop additional products in this section of ExchangeLand, as it brings these services to a market on a global scale. The only way to expand this scope would be to link to the Hubble Space Station and somehow offer a benefit for doing so -- safe to say, that's not on the radar.

NYSE ARCA OPTIONS ADVANCES

Developments in this area of NYX are occuring regularly. This is yet another competitive difference between NYX and other bourses in the landscape. Just yesterday, FlexTrade Systems, a big player in the multi-asset algorithmic execution management systems arena, announced that its clients will now have direct access to NYSE Arca Options. FlexTrade's CEO hints towards the quality of NYSE Arca Options as he said,"It's a perfect fit for us," said Vijay Kedia, president and CEO of FlexTrade Systems. "NYSE Arca Options speed and transparency not only enhances the ability of FlexOPT [FlexTrade's brand name for one of their systems], but its competitive price structure creates the ideal trading situation for our clients."

This should translate to order flow and increased NYSE ArcaEx Options volume. Since NDAQ doesn't have a 1:1 competitor for this volume, odds are the WSJ won't print many stories about the volume ebbs and flows here. However, Dow Jones Newswires issues this report this morning:

NYSE Arca Traded 531,442 Electronic Contracts Feb. 9
(Source: DOW JONES NEWSWIRES)
NYSE Arca Options, the electronic options marketplace at NYSE Group Inc. (NYX), traded 531,442 contracts Feb. 9, surpassing the 467,477 contracts traded Jan. 19, the company said.
The trading also marked a 45% increase over January's average daily electronic volume of 380,142, the NYSE said. The marketplace was launched in October.

To Herr is Human

2007-02-12T08:10:00.000-05:00

This morning's post is not so much about the failed NDAQ bid for LSE, but about how ridiculous the The Wall Street Journal and KBW analyst Richard Herr were with their insight towards this headlining event.

On February 10, 2007, the WSJ ran an article by Alistair MacDonald with the headline, "With Nasdaq-LSE Deal Doubtful, Exchanges' Steps Are Unclear." In this piece, the Journal goes to long-time, get-it-wrong, analyst Richard Herr for insight.

The article reads, "...Just this past week, giving Nasdaq some last hope, the LSE's share price had fallen closer to the bid, suggesting that the result isn't certain. Richard Herr, an analyst from brokerage Keefe, Bruyette & Woods, said Friday that there was a 30% chance Nasdaq could get the votes for a majority stake in LSE Saturday..."

For NDAQ to be successful in their bid, they needed 50% of LSE shareholders to vote in favor of their deal. In the end, NDAQ received acceptances worth just 0.41 percent of the exchange's ordinary shares in return for its bid (click here for more on this).

Let's consider Herr's analysis. Among the first questions that come to mind is what model is Herr using that gives him this sort of information? The next question is, what other pieces of truly valuable, statistically-based information does Herr come up with when he publishes his research? These questions lead to the question of accuracy. How inaccurate is he/has he been regarding his high profile analysis of companies in ExchangeLand?

To get a sense of the last question above, just take a peak around the archives here at NYSE ArcaNews to learn how incredibly inaccurate Herr has been about NYX.

What will happen next with NDAQ will be interesting to watch. To be sure, there's no shortage of prognosticating among the popular media. One of the more interesting ideas centers around the idea that Project Torqouise is looking for a technology partner. It's well-known that SuperMontage and other NDAQ technological initiatives are not best in class, and it's become clear through the years that NDAQ can't get a multi-national strategy done right.

Similiarly, watching LSE attempt to stay relevant as NYSE EuroNext becomes an even stronger force to be reckoned with will be interesting to watch.

These NDAQ stories certainly make for entertaining fodder in between the real, landscape changing technological advancement and multi-national deals that NYX continues to execute.

American Eagle Joins the Leaders

2007-02-06T11:41:00.000-05:00

Today's news that American Eagle Outfitters is delisting from NDAQ to list on the Big Board is another win for NYX. What makes this win particularly interesting is that when RHT did the same thing a short while back, their departure caused a hole in the QQQQ ("Cubes" if you're cool) ETF.

This hole was plugged by replacing (then 4-letter ticker) RHAT with AEOS (soon to be 3-letter ticker). This departure from Nasdaq creates another vacancy in the Cubes.

Also, HP's stroke of management genius to drop its Nasdaq listing and list solely on NYSE is yet another reflection of leading companies with visionary managers making decisions that help their shareholders (lower listing fees), and traders (best in class/world trading platform).

Here's a link to the NYSE ArcaNews story from 12-12-06 about the RHT move.

Go East, Young Man! (or west depending on perspective)

2007-01-30T16:06:00.000-05:00

First, the picture on top is the Tokyo Stock Exchange (TSE) now. The one below that is what the TSE looked like in 1990 - prior to margin expanding technological innovations that have transformed it into an incredibly efficient (and about to grow more stable) platform for issuers, traders, and investors. If you watch CNBC or Bloomberg, you can see firsthand how the complexion of the the NYSE floor is evolving in a similiar fashion (thanks in large part to a brilliant deal with ArcaEx).

This afternoon Taizo Nishimuro, the Tokyo Stock exchange's CEO and John Thain addressed the Japan Society in New York. During this talk, Mr. Nishimuro, said that an agreement may be announced Wednesday, and that the TSE and NYSE Euronext may cooperate on areas such as new products, listings and systems (this info comes from a Dow Jones Newswire release written by Gaston Green that came out this afternoon).

If and when a deal is announced, it will be yet another demonstration of brilliant jockeys aboard a world-class champion thoroughbred! Designing a business plan that's strategic, innovative, and smart is one thing. Executing is another thing, entirely. Just look the pervasive pie on NDAQ's face that's accumulated over the years. Just a quick review:

In 2002, Nasdaq wrote off a $20mm venture with the TSE that it entered into during 2000. Click here to learn more about that failed initiative.
In 2003, Nasdaq shutdown its ill-conceived Nasdaq Europe (click here for more on that).
Also in 2003, Nasdaq failed with their attempt to execute a plan with Commerzbank and Dresdner and the Berliner Bourse something like five months after the deal was done. (Click here for more on this)

The latest LSE dibacle illustrates what a difference in quality underlays the NYSE and NDAQ. But that's another post for another day. Back to the TSE. . .

Here is a peak at part of what makes the TSE so exciting. First, note the significant rise in net income and revenue noted in this release. Both are displayed at the top of the linked PDF.

Here's a link to a portal for plenty more background on what looks like the newest addition to a truly global marketplace.

Sweeping Changes at the NYSE

2007-01-25T12:12:00.000-05:00

Today's NYSE ArcaNews entry is short and sweet. The often cited WSJ reporter, Aaron Lucchetti, scribed a very interesting article in today's Journal. To be sure, NYSE ArcaNews has covered Mr. Lucchetti's coverage through the years, and today's article finally reveals some factual information that's worth digesting. For obvious copyright reasons, the article won't be posted here, but the headline reads, "NYSE: Faster (and lonelier)." Here is a round-up of some interesting facts contained in this article:

This snippet illuminates what's so monumental about the NYSE/AX Merger and the efficiencies that AX brings to the NYSE:
* ". . .for the employees who work on the NYSE's iconic trading floor it means fewer jobs and the biggest change to the way the Big Board has traded stocks in its 214-year history."

This blurb helps to explain why in the world NYX was booed on the Floor on the day of its IPO:

* ". . .It's been a very painful" few months, says Michael Rutigliano, a longtime NYSE floor broker. "I understand why it's happening, but it's not pleasant when people you have admiration for are losing their jobs." Last week, traders gave departing colleagues standing ovations on about a dozen occasions when the laid-off employees left the floor for the last time."

This part of the article illuminates how innovative and solid technology can enhance business processes:

* ". . .Now, specialists, instead of overseeing trades in a handful of stocks, supervise computer programs that spit out thousands of trades a minute. One sign of the change: Specialist clerks that collectively banged their keyboards 45 million times a day have cut that to fewer than 20 million keystrokes."

And this video is outstanding! It's a 4-minute interview by Lucchetti with Richard Barry, a LaBranche & Co. specialist. One takeaway from this conversation is Barry's statement that one of the biggest changes with Hybrid is that before turnaround time for an average order was between 8-9 seconds. He goes on to say that now the turnaround time is now 200 miliseconds.

It's refreshing to see factual information being published. These changes are indeed monumental and revolutionary. This is perhaps the most exciting time in the evolution of the global bourse world -- and NYX is certainly the lead engine.

Hybrid's In Place!

2007-01-23T11:27:00.000-05:00

Since 4/20/2005 (NYSE and Archipelago's merger announcement), there have been monumental structural changes to the way trades get done at the NYSE. Regulation NMS helped usher in regulatory changes that helped generate competition, efficiency, transparency, and overall fairness in the equity market structure.

The efficiencies include the replacement of some of the quickest digits known to mankind (read: the fingers that onced tapped feverishly on floor of the NYSE) by computer systems that underscore the greatest transformation seen on Wall Street in decades, if not centuries. Greater efficiencies improve margins, and also improve the quality of trading.

Van Der Moolen announced today that 30% of their US-based employees will be getting the ax (pun intended). This comes on the heels of LaBranche's cuts and other firms that once dominated to NYSE infrastructure. Macchiveli writes that change leads to other change, and the transformation occuring on the corner of Wall and Broad reflects this Macchivelian idea. Just think about how much has changed in this space since Archipelago debuted as a public company in 2004. And, it's exciting to think about changes that will occur in this space over the next couple of years.

HEY WHAT ABOUT US? NDAQ CONTINUES NONSENSE
It's worth noting that NDAQ seems to come out with nonsense that grabs media attention during times that notable advances in the execution of the NYX business plan by a host of briliant managers occur. Today, NDAQ's spotlight quest comes as a letter to LSE shareholders that the company they mutually own has unrealistic growth targets. While NDAQ is busy sending unsolicited takeover faxes to LSE's management, and drafing letters to shareholders that aren't their own, NYX continues to execute it's well-conceived plan to dominate the global marketplace for nearly all investment products. The correlation between NYX's successes and NDAQ's blunders are worth noting.

As March approaches we should start to hear about perceived issues related to lockups of NYX stock. It'd be great to hear what Langone and Higgens have to say about the value generated in their shares since last March.

The move to Hybrid is a major accomplishment. Congratulations to all that have been working on going totally live with it this month.

Here are two links to much more about what makes Hybrid so exciting:
1) NYX Website's Info
2) NYX Hybrid Blog

Hope these links help.

CNBC's Cramer's -- On The Money!

2007-01-05T11:43:00.000-05:00

In case you haven't yet heard. Jim Cramer, has come out with his stock picks for 2007. He revealed that his #1 pick in the Growth Stock category for 2007 is. . .NYX!

Here's what he said according to TheStreet.com's "Mad Money Recap":

"And the Winner Is...NYSE Group. Cramer's growth stock for the new year is the NYSE Group. If you're comfortable taking a few risks to make more and more mad money, NYX is for you," he said.

Cramer believes the NYSE will grow, blow away its estimates and "keep flying" because its main objective is to make money. The company is shutting down trading rooms and laying off people, replacing them with faster and cheaper machines.

Cramer said the stock has great revenue growth and a sound cost-cutting strategy, which should save the company millions of dollars. In addition, it has the lowest operating margins of all publicly traded exchanges and "low, beatable estimates," Cramer said.

The only reason NYSE shares are down is because of arbitrage pressure from its pending Euronext acquisition, said Cramer, and that pressure shouldn't last. The NYSE is ready "to conquer the world" and should go to $240 a share, Cramer said."

2007: A Year of Transformation

2007-01-04T13:30:00.000-05:00

Today, Morningstar handed out its annual "CEO of the Year" award. The news here isn't so much who won, but the managers that were in the running. NYX's CEO, John Thain has demonstrated his brilliance as he inked a revolutionary deal with Archipelago Holdings that essentially rescued the storied institution from obscelence. Then he helped navigate the Atlantic to create a cross continental fusion that will serve as a pool of liquidity never before seen. The deal with Euronext is just the latest example of what happens when incredibly smart people work hard together to extract value from what well may be the most well known brand on Wall Street (and for that matter, on Earth).

Here's a blurb from the Morningstar news release mentioning Mr. Thain:

"In addition to Oberton, the finalists for Morningstar's 2006 CEO of th Year award included: John Chambers, chairman and CEO of Cisco Systems (Nasdaq: CSCO); Ken Chenault, chairman and CEO of American Express (NYSE: AXP); George Roche, chairman and president of T. Rowe Price Group (Nasdaq: TROW); and John Thain, CEO of NYSE Group (NYSE: NYX)."

HYBRID HUMMING ALONG

CNBC's Mark Haines was mystified yesterday morning. He walked around the floor, on camera, pointing out booths that were staffed a week ago with people, and have now been replaced by computers. Haines remarked that things don't look good for traders. NYX shareholders might observe that things certainly look good for cost cutting initiatives.

If you haven't seen it yet, checkout this awesome NYX Hybrid blog for up to date information regarding this incredibly exciting, unique, and efficient system.

DATA FEES

Yesterday, the SEC responded to Netcoalition's whining that NYX should be able to set prices for data feeds to websites such as Yahoo and Google. The argument is pathetic, at best, and helps illuminate the value of what happens at the New York Stock Exchange. To be sure, websites like Yahoo get eyeballs by "re-selling" data (read: raw materials) to consumers. The websites make money by generating these eyeballs (by attracting advertisers). However, for Yahoo's Finance section, the market data that's furnished by NYX is the lure for many consumers. If these websites can profit due to NYX's data, why shouldn't NYX be able to profit for supplying this data to the websites?

The SEC already approved the fee increases, but Netcoalition is flexing its political muscle to try to influence the SEC to interfere with the free market. Though data fees are ~10% of the overall revenue picture for NYX, it's an stream that could grow nicely. Buffet might call this part of the joy of being a (responsible) tollkeeper.

Things get interesting when you consider that Euronext operates under European regulations. Netcoalition's influence in Europe may not be quite what it is in the US. Just another example of the wisdom of management to diversify geographic and regulatory risk.

What a Year!

2006-12-28T09:47:00.000-05:00

2006 was certainly eventful for NYX shareholders. Since it's the last trading week for 2006, lets take a quick look back (please browse the archives here at NYSE ArcaNews to get a sense of what was going on YoY in ExchangeLand).

Last December, the NYSE seatholders voted and approved the most monumental deal in the history of the world's capital market structure. Though perennial synics like Lucchetti, Reppetto, and Herr (to name a few) constantly made public their doubts that the deal would close, and if it did close that it would ever be beneficial to shareholders (read: Reppetto, Herr, etc's customers).

That was then. The deal closed, the newest oldest company around IPO'd in March, and NYX has never looked back.

While NDAQ butchered its credit quality while trying to inch its way to the spotlight, NYX quietly pursued creating the first Trans-Atlantic exchange. The NYX team and Euronext worked diligently towards a fair deal, and just a few months after the NYX became a for-profit enterprise, the deal was done -- NYSE Euronext has been born.

This means that in addition to the hundreds of millions of dollars that NYX will save in cutting redundant costs, the company has a best-in-class platform for options, futures, bonds, and stocks.

To be sure, futures have gotten much attention as their margins are wide enough to drive a train through (read: they're incredibly big). NYSE Euronext's Liffe (click here for more info on Liffe) brings NYX into this lucrative marketspace.

Though not the most happy headlines, the cost cutting at the Big Board has been quite impressive. Many were aware of the fat that the NYSE schlepped around for centuries, but to actually see the savings that result from rightsizing the organization is not only good for NYX's bottom line, but it's a reflection of a culture that's completely changed, and a focus on driving shareholder return while keeping the NYSE the most advanced and largest bourse on the planet. For example, ~20% of the trading floor is being shut down, and scores of the old brass were made redundant.

WALL STREET JOURNAL'S NONSENSE
Of course, the year was spotted with nonsense from the media and sell-side community. The Wall Street Journal's, Aaron Lucchetti could probably get a gig working for sales organizations to lead brainstorming excercises about potential objections (if you prepare for potential objections, you can be ready to overcome them). For years he's been writing about every possible unfavorable outcome for any strategic initiative that the NYSE undertakes. His expensive prose about NYX have consistantly mislead for years (he constantly got the AX story wrong too).

SELL-SIDE NONSENSE
Not to be outdone by the WSJ, the majority of sell-side shops (that cover NYX) have consistantly demonstrated to their customers that they oughta ignore their thoughts. There are some specific analysts that are candidates for Clown-with-a-Calculator-of-the-Year. First, the candidates:

* Richard Reppetto, Sandler O'Neil
* Richard Herr, Keefe Bruyette
* Michael Vinciquerra, Raymond James

Click here for a summary of how clear the aformentioned clowns vision is. You can gain a sense of their accuracy, but more importantly, you can gain a sense of how incredibly distorted their mosaics are that they use to determine NPV of NYX stock based on projected cash flows.

And, the winner is:

Sandler O'Neil's Richard Repetto!! And here's why.

Repetto's been wrong about NYX since it was in gestation (AX). Simply put, he's constantly been wrong about NYX. The reason that he beats the other clowns out for this title goes back to his appearance on CNBC in March, the day of the NYX IPO.

While many were celebrating the birth of NYX, Repetto spoke on CNBC about his idea the potential of the NYX has already been priced into the stock (when the stock IPO'd it was trading in the 60 - 70 range, and it even tradfed up to 88). Recall, at that time, there was no real discussion about NYSE Euronext. Maybe just some speculation that an exchange could do a cross-border deal. Nonetheless, Reppetto was bearish.

It's truly worth listening to a quarlerly earnings call so you can hear, first-hand, how the analysts typically are not viewing NYX's glass as half-full. It's not unusual to hear NYX's management correct an analyst as they ask their questions during the Q&A of the call. I still think my favorite question he's asked was to AX's management years ago. His question to AX management centered around why AX's daily trading volume was so light. Boy, that's a great question for management during its quarter-end call. At least it was indicative of what sort of metrics Reppetto spent time analyzing.

LOOKING AHEAD
Now the NYX will operate its cash markets in 2 of the 3 largest currencies. It's refreshing to hear a focused management team that knows how to execute. NYX told the street that they were interested in expanding into Europe -- and it happened. Now they've said they're interested in expanding into Asia. Quietly, they'll execute. In the meantime, the aformentioned clowns with calculators and typewriters, may continue to create drama by taking the other side (read: pointing out potential pitfalls) as they position for next year's NYSE ArcaNews annual clown award.

In case expanding into Asia (or other countries/currencies) is not big enough news. Other initiatives include Hybrid, creating structured products, and adding listings to NYSE Arca (hopefully at the expense of NDAQ -- see RHT).

So, once again, Happy New Year to my NYSE ArcaNews readers. I hope you've enjoyed my blog, and I look forward to another year of bringing you my thoughts on what I truly believe is the most advanced, innovative, best managed, strongest brand, bourse in the world.

What a year!

Time to Vote

2006-12-18T23:52:00.000-05:00

No doubt, with the upcoming votes, history is on the cusp of being made. NYSE Euronext will create a bridge between the capital markets of Europe and the US never before seen. The cost savings, revenue-stream diversification, technological leverage, etc. that NYX Euronext weaves is unprecedented. If you'd like to hear a webcast of the Euronext General Meeting tomorrow (at 5 AM EST) click here.

Also, for some background on Euronext click here.

Nasdaq loses Red Hat to NYSE

2006-12-12T08:33:00.000-05:00

UPDATE:
Here's an interview from Dow Jones (Marketplace) with RHT Chairman and CEO, Matthew Szulik, from this morning as he comments on his firm's great choice to get Listed. Since this video may eventually get removed from the website (and this link will be no good), here's a quote of what Mr. Szulik says towards the very end of this vignette:

Marketwatch's Steve Gelsi:
"...Now that you're [Listed] on the NYSE, are you looking for less volatility?"

Szulik: "Certainly, that was part of our thinking, Steve. We thought that the use of specialists and the technical direction that the NYSE is heading in will give our shareholders, hopefully, less and less volatility in their trading ranges."

It's great to see a revolutionary company like Red Hat align itself with a revolutionary, global powerhouse like the NYX. If shares could speak, RHT would be singing Kumbaya.

### END OF UPDATE ###

In yet another example of NYX's dominant market position, Red Hat (formerly, RHAT), has decided to move to the world's most advanced stock market -- the NYSE. Beginning today, they'll trade under the ticker, "RHT."

As part of the Nasdaq 100 (QQQQ), RHAT was a core listing for Nasdaq. To be sure, Nasdaq was once considered the destination for firms that valued technology and progressive thinking. However, the NYSE/AX integration has created the most innovative and advanced stock market in the world.

This is a big win for NYX and is a reflection how the landscape has changed.

Under the new landscape, a company like RHT, which was formed in 1993, could initially list on NYSE Arca if they didn't meet the listing requirements of the Big Board. On NYSE Arca they'd enjoy openness, fairness, and strict price-time priority (Click here for more advantages to a NYSE Arca listing).

NYSE Arca serves as a wonderful destination for firms to list and work towards achieving a Big Board listing as the company grows. As NYSE Arca/NYSE gain traction in attracting traditionally Nasdaq style listings (like RHT), NDAQ will likely turn into a dollar-store-like market for financially inferior firms to trade their shares.

So now American Eagle Outfitters replaces RHT in the Nasdaq 100. That just seems odd. Suppose if AEOS could talk, a share would be singing the Monkees, "What am I Doing Hanging Around?"

Too hard to ignore!

2006-12-05T15:06:00.000-05:00

UPDATE: After the original post today, NYSE ArcaNews learned about the SEC's approval of completing Hybrid's exciting, Phase III, rollout in January. Read all about this incredibly monumental news right here. To get a sense of the scale that Hybrid has already achieved, checkout this listing (Adobe Acrobat needed to read) of activated issuers. To be sure, numbers this big are hard to ignore!

Now that the European regulators have given the green light for NYX and Euronext to join forces, it's interesting to look at the competitive landscape as it collectively watches NYX Euronext dominate the global stock marketplace.

To be sure, NDAQ's mission to have a meaningful presence outside of the US continues to make for interesting fiction, but with inferior credit quality and an unwilling seller seems quite unlikely to materialize. And, occasional ideas that bulge-bracket firms can discover a core-competency in running bourses make for fodder in bidness rags.

But, today's remarks from Deutsche Boerse AG supervisory board head Kurt Viermetz illuminate some of the opportunity that lays ahead for NYX Euronext. He says, "Now for the first time, it seems realistic that Europe will continue to grow even if the U.S. is experiencing a marked slowdown." (Source: Article by Ragnhild Kjetland; Dow Jones Newswires; 12/5/06).

Clearly, part of the opportunity that the Euronext merger fosters is that NYX and Euronext, in many ways, can hedge each other's risk related to issues particular to a nation's currency, economics, politics, etc. So, in addition to diversifying revenue streams and cutting costs significantly, a trans-Atlantic business reduces risk for both NYX and Euronext.

SHORT-INTEREST

On another note, it appears as though short interest in NYX has actually increased from 10/10/06 to 11/10/06. This information is available through Finance Yahoo (click here to see). Of course, the market's the market, but if you haven't noticed, the NYX stock has been acting a bit squirrly lately. Remember, as a stock goes higher, those that are short shares lose.

The loss continues to deepen until the short-seller (one who borrows shares to sell; artifical sellers in a sense) covers their short by buying back the shares they borrowed. They lose if the stock goes up since they have to buy it for more than they sold it for. Theoretically, a short seller has an unlimited loss potential. Anyhoo, those that are short a stock end up buying it back at some point. Often, a high short-interest can serve as a bullish indication since it indicates built-in demand.

Granted, the short data mentioned above is nearly a month old, and I don't have any more recent data. However, odds are, folks who shorted NYX could use some Rolaids about now (or some clown to downgrade the stock).

JP, Why'd You Do It?

2006-11-29T09:01:00.000-05:00

This morning JP Morgan chose to take the sell-side-can't-get-NYX-right spotlight from the clowns with calculators at Raymond James (read: Raymond James downgraded NYX back around $70 most recently).

Today's comments from Morgan are cited in this Dow Jones news release:

NYSE Group Cut At J.P. Morgan; Integration Risks Cited

Source: DOW JONES NEWSWIRES

J.P. Morgan cut its rating on the NYSE Group, Inc. (NYX) to neutral from overweight, saying that while it continues to believe that the company will be a global exchange winner, clawing back lost U.S. equity market share and continuing to make acquisitions, it feels the positive news is already priced in the shares.

In addition, the broker told clients that although NYSE management has done a great job with the integration of the Pacific Exchange, it sees the Euronext integration as being complex.

"It could be subject to both regulatory and integration setbacks," J.P. Morgan cautioned.

### END OF DOW JONES PIECE ###

It's the second to last paragraph that underscores how JP Morgan is missing the boat. How can they cite NYX's integration of the Pacific Exchange when that was an acquisition made by Archipelago way before NYSE and AX merged.

Integrating systems and platforms while broadening the breadth of investment products available to the public, while simoltaneously fostering the fairest, fastest, and most innovative boarse infrastructure in the world is a core competency of NYX and it talented and proven management team.

Also, integrating a centuries-old open outcry floor model with the world's most innovative electronic bourse (AX) should be noted by Morgan. In case they've not heard, Hyrbid is on the way and the art of integration will be demonstrated once again by NYX.

Chuck Berry's prophetic question comes to mind. "JP, Why'd you do it?!"

Full Steam Ahead!

2006-11-15T11:30:00.000-05:00

This morning it was announced that DB has pulled their bid for Euronext. To be sure, the NYX short sellers scrambled to mitigate their losses as Hybrid takes hold and the management team at NYX flex their business accumen and cut costs significantly (making ~500 employees redundant).

CNBC's Kramer finally woke to NYX's potential as he demanded that his viewers buy at least one share of NYX. While his price projections (he called for NYX to be $250 stock with earnings of $10/share, but didn't specify his time frame) may not be rooted in EVA, cash flow projections, IRR, or other metrics, his sentiment is clear -- get long NYX because they're going to lead the global capital markets.

The nonsense that Lucchetti wrote about months ago related to the DB bid again seems to be nothing but a waste of ink, precious real estate in Wall Street's favorite rag, and a extraordinary waste of readers time. The outcome, which has been written about often here at NYSE ArcaNews, is that NYX and Euronext are merging (subsequent to a final shareholder vote on 12/19). The NYX will compete on a global basis and be able offer unprecedented liquidity, technology, structured products, and breadth of revenue streams.

It's been fun to watch the open interest in the NYX 115 2008 options. When I BOT mine, my contract was the only one in the overall open interest. Interest in this option has risen dramatically as 2008 gives plenty of time for Hybrid to launch, Euronext to be inegrated, and other dramatic catalysts (maybe Sarbanes-Oxley repealed, acquisitions, competitors stumbling, NYSE Arca picking up steam in its listings and winning share from classic early-stage lister Nasdaq, etc.).

The Curb (AMEX) is still out there and its connection with SIAC is interesting. There are certainly synergies between AMEX and NYSE and it should be interesting to see AMEX's plans unfold as consolidation in exchange-land continues (and NYX leads the charge).

It's interesting to watch the NYSE evolve -- and it's especially fun to watch the centuries old NYSE transform itself into an Archipelago!

Happy Thanksgiving to my loyal NYSE ArcaNews readers. NYX shareholders certainly have much to be thankful for this year.

NYX Firing on All Cylanders

2006-11-06T23:50:00.000-05:00

Things seem to be humming along with NYX's initiatives across the board.

Hybrid is firing on all cylanders, and the Euronext vote is around the corner. The stretch towards the end of 2006 should see the beginning of an era in capital market structure never before seen.

In addition to NYX's margin expansion and revenue diversification, NYSE Arca is quickly emerging as an alternative listing venue for companies that want to be listed on the world's most recognized and sophisticated bourse. Click here to read more about NYSE Arca as a listings venue.

SPEAKING OF LISTINGS

As ETFs continue to grow incredibly popular for investors, NYX is facilitating their growth as the number of listed ETFs has grown dramatically at the NYSE. Click here to read more about this.

There are many reasons for this transformation from mutual funds to ETFs, and here are a few advantages that ETFs have over mutual funds:
* Investors can use options on ETFs to reduce risk (decrease beta, etc)
* Investors don't pay distributed capital gains taxes in ETFs (mutual fund holders share the tax liability created by fund holders who redeemed their shares during the year)
* They are typically significantly less expensive than mutual funds (especially when used in a fee-based account)
* The benchmarks that are typically represented in ETFs outperform their actively-managed counterparts in similar sectors/caps/styles.

So, near-term catalysts like Hybrid and the Euronext vote should indicate that NYX is executing their well-thought out plan to lead the transformation of the global capital markets.

Hybrid Session Premieres Without a Hitch

2006-10-07T16:22:00.000-04:00

It looks like yesterday's Hybrid launch went quite well. Click here for the NYX's blog about Hybrid. It's a great resource to help you keep your fingers on the pulse of Hybrid's development.

Also, there's a nice variety of media commentary regarding Friday's premiere session there as well.

Great Strides

2006-10-05T21:58:00.000-04:00

The market seems to be starting to understand the NYX story. The stock has made its way back to levels not seen since last Spring after taking a pounding from a strikingly high ratio of artificial sellers (see short interest of 10.10% as of 9/12/06) and a plethera of media and analyst nonsense to fuel bearish sentiment.

DEJA VU ALL OVER AGAIN

It's striking to look at the year/year similiarities between NYX last year and this year. Of course, it's not exactly apples-to-apples since last year at this time Archipelago's stock, AX, was not only trading on its own merits, but it was also essentially a proxy for shares of NYX which didn't become publicly-held until only about seven months ago.

Last December the stock's headwind centered around the notion that NYSE seatholders like Langone and Higgens would lead a revolt against the terms of the AX/NYSE merger. There was much made of coalitions that didn't support the terms of the merger. Similiar to the volatility that surround shares of NYX (that are likely) due to jitters about things like the Euronext deal not getting done, AX's shares would have significant price fluctuations that likely had something to do the market's worries that the AX/NYSE would not get done.

RAYMOND JAMES' DISCONNECT

On 10/2/2006, Raymond James contrarian, Michael Vinciquerra downgraded NYX from Market Perform to Underperform. Lets not forget Vinciquerra's downgrade on 5/9/2005 when AX sat at $33/share. For those that listen to quarterly calls, you've heard Mr. Vinciquerra make comments/ask questions which reflect his poor handle on NYX's business. Usually what Vinciquerra thinks is counter to what the market thinks about NYX. And so far, this latest downgrade is no different. NYX closed at 73.86 on 10/2/06 -- essentially 4 points lower than today's intraday high.

I encourage you to flip through the archives here at NYSE ArcaNews and read historical posts that document how often analysts like Vinciquerra, have missed the mark with NYX/AX.

FIRING ON ALL CYLANDERS

Great to see another Nasdaq defection to NYX. Today, Metal Management (NYSE: MM) debuted on the Big Board marking the 14th transfer to NYSE Group markets year-to-date, following six transfers from Nasdaq, one transfer from Nasdaq to NYSE Arca and six transfers from Amex.

It appears that things are headed for a completed deal with Euronext, that listings are growing solidly, and that the breadth of product and service offerings that NYX serves up is increasing with exceptionally-talented, experienced, and connected managers leading the charge. Hybrid seems to be humming along as the system went through an impressive test on 9/30 involving the trading of about 6 billion shares (compared with the average 1.4 billion trades in a day).

And on 10/6, NYX will roll out two listed securities on the new Hybrid platform! American Express Company and Equity Office Properties. Kellogg and LaBranche and will handle trading for these two stocks.

Arca's Allure

2006-09-13T09:37:00.000-04:00

In the beginning there was ArcaEx. A digital stock exchange that fosters a fair and competitive marketplace for equities and derivatives to be traded. NYSE ArcaNews has plenty of posts from a couple of years ago describing the threat that ArcaEx created for traditional players with open outcry models -- namely the NYSE.

Traders Magazine has an interesting piece that describes how Specialists are warming up to ArcaEx. (read it here) This is significant as players like LAB migrate to the emerging stock market model. One where lead market makers serve the role of Specialists. It's a transformation that is reminisent of how instant replay is used in the NFL. It hasn't replaced referees, but it has improved the fairness, the competitiveness, and overall quality of the game. As a result of the technological improvement of instant replay in the NFL, there were new rules introduced (how many challenges teams can make per half).

Another example of an application of how technology has enhanced an age-old business is ATMs in the banking industry. Among other things, ATMs are open 24 hours/day (have extended hours), are incredibly efficient, and reduce input error dramatically. In fact, initially there was thought that ATMs could take the place of tellers. This idea is similiar to the notion that an electronic system could replace a Specialist. However, what seems most likely is that like NFL referees, Specialists will see their role change -- not be replaced.

In addition to adding value for companies that list on NYSE Arca, ArcaEx adds value for traders, and for lead market makers (including Specialists that emerge as lead market makers). As the Euronext deal becomes solidified, it's exciting to think about other applications of the Arca engine in an expanded universe of equities and derivatives.

(I have been incredibly busy lately so I apologize for the lack of posts recently.)

Happy Birthday to NYSE Arca Options

2006-08-07T18:03:00.000-04:00

It's been quite some time since the last update to NYSE ArcaNews. However, NYX's outstanding quarter and earnings announcement, Jeffries' upgrade , the SEC's approval of NYX's options platform, and today's subsquent launch of NYSE Arca Options have inspired an overdue update to NYSE ArcaNews.

Going sequentially, NYX turned in an absolutely amazing quarter. The synergies from the Arca deal are taking hold, and everything seems to be humming along famously. They beat the Street by a couple of cents, and had a very upbeat conference call following their announcement. The usual analysts were on the call -- complete with poorly calculated conclusions that prompted management to help guide these analysts in terms of how to look at certain things. More than once, Mr. Chai had to help an analyst see things as they actually are.

Next, the Jefferies updgrade. After getting things wrong since the AX IPO, it seems as someone decided Jefferies customers might be better off if Chamberlain didn't cover NYX. Jefferies analyst, Richard Shane wrote, "We believe second-quarter results reflect the substantial benefits of consolidation" and "that the proposed Euronext merger will provide the opportunity to continue these positive trends through 2009." Jefferies lifted the NYSE's earnings estimates for this year to $1.52 a share from $1.42 previously (source: http://tinyurl.com/grgmc).

As management stated on the earnings conf. call, the SEC's options approval was around the corner. It was not going to be months, but rather weeks. ]They were literally waiting for the okay. They received that approval on 8/1/06, and today NYSE Arca Options launched. This is an absolutely historic time for the NYX and the launch of this platform will add to NYX's revenue base. It also further diversifies the exchange's product mix, and the technological engine that fuels this options marketplace will make NYX a contender in the options space. Once again, the company continues to execute and grow.

Thank you for your continued interest in NYSE ArcaNews. I apologize for the lull. And for what it's worth, I'm as bullish on NYX as I've ever been.

CME's Potential Competion

2006-06-20T13:06:00.000-04:00

Today, CME essentially has the Futures market cornered. However, when the NYX/Euronext deal closes and the new synergistic, revenue-diverse, powerhouse of the new transatlantic bourse is operating, the CME will have formidable competition.

A brief story from Dow Jones hit the wire a little earlier this afternoon. In the story by Margot Patrick, from Dow Jones Newswires CME CEO, Craig Donohue, is cited. Patrick's piece says, "Speaking to journalists at a briefing in London, Donohue said Euronext 'is already a very formidable exchange, well-run, with good technology and depth of expertise in derivatives. I always have viewed it as a significant competitor and this doesn't change that.'"

Of course this isn't really news and NYX's continued penetration into deriatives is no surprise. However, it's always nice to hear how Mr. Donohue feels about this landscape changing deal.

Also, it's worth noting the brilliant foresight of Jerry Putnam and Arca's amazing leadership team for having former CME CEO, James McNulty, become a director (since 8/2004). After AX and NYSE joined forces, Mr. McNulty was named to the NYSE board, on which he currently sits.

Mr. McNulty served as President and Chief Executive Officer of the Chicago Mercantile Exchange from February 2000 to December 2003, and of Chicago Mercantile Exchange Holdings Inc. from August 2001 to December 2003. He served as a director on the boards of Chicago Mercantile Exchange Holdings Inc. and the Chicago Mercantile Exchange from April 2002 to December 2003 and previously served as a non-voting member of these boards (click here for source).

NYX's Brilliant Move

2006-06-14T11:12:00.000-04:00

Management at NYX hasn't missed a beat and continues to execute its plan to become a diversified, global bourse that maintains its worldwide leadership position. With the game-changing merger between AX and NYSE, NYX demonstrated its ability to see where the puck is headed, and moving there quickly in order to make the next play.

With the advent of Reg NMS, NYX positioned itself by combining NYSE with ArcaEx. When the NYX deal was announced, the stock did respond favorably, but then came the threat of Langone and Higgens busting the deal and the threat that the ~1300 seat holders wouldn't vote for the terms of the deal. To be sure, this received considerable attention from journalists and analysts. This is the same pattern that is occuring with the Euronext deal.

The same journalists and analysts are casting doubts that the deal will close on the terms that the two firms have agreed to. With the AX/NYSE deal, reporters and analysts wasted so much ink on the notion that the terms of the deal (the percentage of ownership allocation between AX shareholders and NYSE seat holders) would not sit well with the group of NYSE seat holders. Lucchetti published a piece about the mounting support for busting the deal that Higgens and Langone were building. Each report that there would likely be a disruption to the deal created uncertainty and fueled nervous shareholders to sell their stake. For the most part, those early sellers are probably regretting the faith they put into the dramatic nonsense. Ultimately, the dust settled, the terms of the deal were the final terms of the deal, and it became clear to observers that all of the banter about what would be equitable to NYSE seat holders was merely fodder for WSJ readers.

And, as the game changing news about NYSE and Euronext was released earlier this month, similiar fodder from the same scribes and wizards has begun to emerge. This time, the drama centers around the idea that DB is interested in Euronext and in busting up a NYX/Euronext deal. Again, it's back to the terms of the deal.

The scribes and wizards have painted a picture that DB is eager to purchase Euronext, and is willing to counter-bid a NYX offer in order to do that. In a market that's already nervous about the broad economy, these sort of stories add to the anxiety that many investors are feeling. And this tends to shake out lots of investors. We've seen that.

The reality is that like others in the Exchange space, DB's stock has taken a 20% beating. On 5/9/06 the stock was at 127 and closed yesterday at 102. While not quite as dramatic as the drop in NYX shares since the hysteria about a potential DB counter-deal emerged, is down ~25% (NYX is ~51/share as of this post and closed at ~68 on 5/9/06).

Despite what the scribes and wizards print, Euronext is clearly in favor of the NYX deal. It looks like the path of least resistance will be a NYX/Euronext merger, and again, that will prove the publised journalist and analyst reports to be fodder for business-news fans. In the meantime, the NYX shares reflect the "voting machine."

However, when one focuses on the merits of the Euronext deal, the margin expanding potential of a global bourse, looks at things through things like a Porter Force analysis, assesses the long-term value creation, and pays attention to the brilliant strategy and execution of a top-notch management team, then one can see this deal for what it is truly is -- a demonstration of strategic and brillian management.

Euronext information

2006-05-25T21:00:00.000-04:00

To be sure, the recent news of NYSE's bid to join forces with Euronext is exciting. Here is a link to Euronext's annual report that's full of good background information. If you flip to page 13 (page 17 of the PDF) you can see some of the synergies that would result from a NYSE/Euronext unification.

In addition to creating a company that would collect revenue for up to 12 hours/day a merger with Euronext would catapult NYSE into a "wide range of interest-rate, equity, index, commodity, and
currency derivative products" (page 13 of Euronext annual report).

More Analyst Garbage

2006-05-16T09:39:00.000-04:00

In light of the recent analyst reports from Bear Stearns and Raymond James, NYSE ArcaNews felt it appropriate to remind folks about the lousy track record that these wizards have when it comes to assessing how the market will value shares of NYX (or AX as the case was prior to 3/06).

If you click the chart above (it'll enlarge and) you'll notice that many of the analysts that cover NYX have been consistantly wrong for quite some time.

Bearish Stearns
Many of these analysts have demonstrated that they don't know how to determine how the market will value shares of companies in NYX's competitive landscape. For example, Dan Goldberg, the author of yesterday's Bear(ish) Stearns report (incidentally, the NYSE and the SEC fined Bear $250 million recently for violating rules), piped up on May 6, 2004 and slapped the same rating on CME as he did yesterday on NYX. "Peer Perform" is the classification that Goldberg gave to both CME in '04 and NYX yesterday. On May 6, 2004, CME closed at $116.36. Imagine taking his research to heart and either selling CME short at those levels or simply selling CME or not buying it due to Goldberg's call.

As of this posting, CME is trading at $462/share! Talk about contrarian indications!

Raymond James
Not to be outdone, Michael Vinciquerra, the scribe of today's Ray Jay report, demonstrated his difficulty with forecasting a stock's performance during last summer. On July 7, 2005 Mr. Vinicquerra downgraded AMTD which closed that day at 14.05 (adjusted for dividend). Not even a year later, AMTD is trading at ~17/share.

Time and time again, analysts like most of the ones covering NYX, have gotten it wrong. It's incredible that the buy-side is still willing to pay for insight that a 3rd-grader could have. It's truly a wonder that these analysts have managed to stay relevant. Perhaps even more amazing is how Wall Street reacts to their nonsense.

Ultimately, facts prevail. At that point it becomes clear if analysts were right with their assessments. Fortunately, there's enough history, and an easily accessible record of bucket-headed calls (see finance.yahoo.com) to guide investors towards what authors/reports are worth reading -- and which authors/reports aren't worth wasting any time (or soft dollars) on.

Secondary Smoke

2006-05-03T13:50:00.000-04:00

"In the short-term, the market is a voting machine, in the long-term it is a weighing machine."- Benjamin Graham

If you've been a regular NYSE ArcaNews reader you're well aware of Graham's axiom due to the frequency that it's been cited here over the years. In light of tomorrow's 25 million share secondary, it's interesting to look at some secondary offerings from 2003 to see how the market has digested the secondary offerings a few years ago.

Below is a table that illustrates how the market has responded to secondary offerings over time. As you can see, on average, the companies that had a secondary offering have increased the value of their stock by 42%.

If you look at the charts of these companies you'll notice that there was volatility surrounding the announcement of the secondaries, however, true to Graham's words, over the long run, these secondary offerings not only didn't provide a head wind for stock growth, but interestingly enough, shareholders of these companies have been rewarded over time for their loyalty.
(source for secondary info: http://moneycentral.msn.com/content/P57153.asp)

Company	Close Day of Sec. An.	Close on 5/2/2006	% Δ	Link to Historical Price
Anteon Intlv	29.92	54.62	83%	http://tinyurl.com/g2hcr
Pain Therapeutics	6.61	9.11	38%	http://tinyurl.com/rzrr7
OGE Energy	21.19	29.84	41%	http://tinyurl.com/mnbwz
Pacific Energy Partners	24.76	31.92	29%	http://tinyurl.com/p4jtt
Intelli-Check	9.92	5.38	-46%	http://tinyurl.com/myfr9
Bell Microproducts	6.21	6.44	4%	http://tinyurl.com/gtt2u
AvalonBay Communities	47.25	104.09	120%	http://tinyurl.com/nhnml
Regency Centers	35.96	61.26	70%	http://tinyurl.com/fqdg4
		AVERAGE % Δ :	42%

Source:http://moneycentral.msn.com/content/P57153.asp

Lucchetti and WSJ's "Sick Sigma"

2006-04-24T22:59:00.000-04:00

While the media has wasted all sorts of ink (and reader's time) speculating about a NYX/LSE tie-up, today's announcement from London should quell some of this speculative, anonymous source, jibber-jabber.

On 4/20/06, the same day that NYX reported impressive numbers, WSJ's Aaron Lucchetti continued to showcase his propensity to speculate as well as his seeming reluctance to report factual information.

REALITY

Today, The London Stock Exchange said it had not been approached by NYX about a possible offer. This report contradicts recent speculation by the WSJ that NYX was in talks with LSE about striking a deal.

In fact, LSE said it was responding to press speculation and said "it has not received an approach from the New York Stock Exchange about a possible offer" (source: WSJ, 4/24/06).

In a WSJ piece from 4/20/06, Lucchetti co-wrote (with Karen Richardson):

"They [NYX shareholders] know they'll get at least a stake in the biggest stock exchange in the world, a small business in stock options and a budding effort in bond trading. But they may also be getting a piece of a business that could look substantially different in the months and years ahead: The NYSE has talked to London Stock Exchange PLC and European exchange operator Euronext NV in recent weeks about possible deals or alliances. And Mr. Thain has also made clear that he's interested in buying a U.S. derivatives (or futures or options) operation."

To be sure, NYX is smart and methodical. In due course, facts will prevail. If you're new to NYX please refer to some of the archives on this blog to see for yourself just how often the same reporters and analysts are wrong about their speculation about NYX.

At what point do reporters and analysts that are consistantly wrong stop getting handed the megaphone?

REGULATION FULL DISCLOSURE

Reg FD requires that material information about a public company be communicated to all investors at the same time. Certainly, speculation can create drama. And, drama certainly helps sell papers. Thing is, the reputation of a paper relies on the quality of its reporting. Not naming sources, reporting information that is simply not true, and consistantly being wrong with your commentary has an impact on the quality variable.

DAMAGE CONTROL?

It's odd that in today's WSJ piece about the LSE announcement that they'd allude to an article that Lucchetti wrote on 4/16/06 that cited a couple of lines from a recent NYX filing regarding the upcoming secondary as the catalyst for speculating that NYX and LSE were in talks. It's odd because on 4/20/06 Lucchetti reported that "the NYSE has talked to the London Stock Exchange PLC." This assertion by Lucchetti, as we've now learned, was purely speculation and not rooted in fact. Here's what WSJ writer David Weidner wrote as he tries to do some damage control:

"The Wall Street Journal reported April 16 that NYSE is in talks, presumably with the LSE The Journal cited a Securities and Exchange Commission filing by the NYSE that read: "We are currently engaged in discussions with certain participants, although no definitive terms have been discussed or agreements reached." The report also cited anonymous sources saying the exchanges were conducting informal talks."

If Lucchetti's quality controls are any indication, one might classify WSJ's style of QA, or lack thereof, as "Sick Sigma."

Nasdaq's Credit Slides Again

2006-04-13T07:58:00.000-04:00

To be sure, Nasdaq made a splash when word came out that they purchased a chunk of LSE. However, NDAQ's purchase cost it significantly more than just the cash they used to buy their LSE shares. It cost them a further slide in their credit rating. In fact, as you'll read below, Nasdaq is now flirting with junk status.

Among other negatives, companies with poor credit quality end up needing to pay higher rates on their debt. Their debt becomes more difficult to fund. This results in inability to grow and compete.

Here is a clip from a story released this morning by Dow Jones Newswire's Gaston Ceron:

"Nasdaq is facing scrutiny from credit-rating agencies over the debt it's shouldering to finance the LSE share purchase, which follows the heavier debt load Nasdaq took on just last year for its December acquisition of the Inet stock-trading system. Wednesday, Moody's Investors Service cut its ratings on Nasdaq to Ba3 from Ba2, also lowering its rating outlook to negative from stable. Although there are benefits to a deal with the LSE, Moody's noted that the share purchase "will initially result in a material increase in leverage and erosion of debt service coverage."

The action by Moody's came a day after Standard & Poor's placed its BBB- counterparty credit rating on Nasdaq on CreditWatch with negative implications, signaling that Nasdaq's rating could be cut to junk status by S&P. Like Moody's, S&P also cited the LSE stake buy."

Hybrid's Impressive Evolution

2006-04-05T13:31:00.000-04:00

As of 4/4/2006 there are 1659 Listed stocks active in Phase I of the Hybrid Market. According to the NYSE Hybrid Markets blog (click here for that), that number is four times the number of stocks that were active in Phase I as of 4/3/2006. In other words, 401 stocks were in Phase I on 4/3/2006 and as of 4/4/2006 there are now 1659 stocks active in Phase I.

If you're wondering, there are ~278o companies listed on the NYSE as of this post. This means that we've cleared the halfway point as far as activity in Phase I of Hybrid for Listed companies.

RESOURCES

If you're curious about Hybrid here are some resources to help:

Click here to view a list of these 1659 companies.
Click here for an 83-page illustrated conceptual guide to Hybrid with plentyof examples
Click here for the Traders Magazine's webcast (from 2/22/2006) devoted to Hybrid
Click here for a bird's eye view some Hybrid concepts

Hybrid Market is yet another example of how innovation continues to differentiate NYSE Arca from the rest of the competitive landscape. The speed at which NYX is moving to get Hybrid in place and the well-thought-out phased approach to their implementation is a reflection of what a truly amazing company NYX is.

NYSE Listing

2006-04-04T11:31:00.000-04:00

This morning's opening bell was sounded by Ireland-based, CRH plc. This is truly a nice listing for the Big Board. Much was made of Schwab's departure from NYX, however, CRH is a company that boasts roughly $16.7 billion in revenue, top-line growth of ~$3bb/year for the last 3 years, book value of ~$8bb, and free cash flow of $1 billion (Click here for source).

Compare that to Schwab's numbers. $5.1bb, top-line growth of ~$600mm/year for the last 3 years, book value of ~$3.5bb, and free cash flow of $550mm (Click here for source).

This is another win for NYX and is clearly indicative of NYX's leadership position.

Repetto Keeps Missing

2006-03-27T14:30:00.000-05:00

This morning Sandler O'Neil analyist, Richard Repetto, is once again talking down NYX. He's been talking NYX down since AX days, and has clearly demonstrated that he does not understand the equity market space. Please scroll down to a few posts back with the analysts scorecard to get a sense for how incredibly inaccurate Repetto has been for quite some time.

This morning, Reuters reports that Repetto is citing a potential for a loss in market share as his reason for questioning NYX's growth prospects. You can read this nonsense here.

Market share concerns are nothing new to the NYSE. Click here for a post at NYSE ArcaNews that discusses how market share erosion worries have existed for over 30 years.

Repetto doesn't mention NYSE market share gains in options and ETFs. NYSE market share in these products continues to increase substantially. For example, for the Q's ("QQQQ"), the most heavily traded ETF, NYSE Arca market share is ~33% today. That's roughly 33% greater market share than NYSE did in the Q's trading prior to this month.

ETFs are the mutual fund for the 21st century. Since 1982's codification of 401(k), there's been explosive growth for mutual funds. However, ETFs are slowly making mutual funds obsolete. Here are the numbers (as reported by the Investment Company Institute):

Total Mutual Fund Assets as of 3/22/2006 = $2.056 trillion (source here)
Total ETF assets as of January 2006 = $312.79 billion (source here)

Wayne Gretzky credits much of his success to always trying to play where the puck was headed (click here to read about that). Each day it becomes more evident that the mutual fund puck is headed to ETFs. It'd sure be nice if analysts like Repetto could pick up on these sort of things instead of publishing periodical bear-crap about the potential for market share erosion. But, according to Gretzky, it was his ability to sense and skate to where the puck was headed that seperated him from the pack. It's clear that Repetto isn't all that familiar with that concept.

While on Repetto, it'd be a shame to leave out his claim that the incredible potential of the NYX has already priced into the shares. According to Repetto, the surge from ~64 (AX's last closing price) to levels in the mid-70s is a result of media coverage of the NYX IPO. According to Repetto, at $64 all of the potential for NYX was already baked in.

According to Repetto, all of the potential for NYX was baked in when the shares were selling for less than $30. See his downgrade of AX at $27 on 4/22/2006 - just two days after the announced AX/NYSE merger (scroll down to the Analyst Scorecard). Talk about accurate forecasts! Why the media still turns to people like Repetto and Herr for statements is mind boggling.

TheStreet.com to Join Short Bus

2006-03-20T12:09:00.000-05:00

Our metphorical short-bus has some long-standing passengers like WSJ's Lucchetti and NewsWeek's Charles Gasparino (see ArcaNews entry here for Gasparino's nonsense). But today, a new name boards the bus.

The Street.com's, Lauren Rae Silva hopped on today. Her story (click here to read) today has the headline, "NYSE: Before the Flood." She starts her prose with this misleading statement:

"Former seat holders of the NYSE will see their dreams of riches come true next month when the newly public exchange lets them cash in their stock via a secondary offering. In light of that, nothing could be luckier for these expert market makers than the dizzying run the shares have taken over the last year."

The problem with what Ms. Rae Silva says is that it implies that the supply of NYX shares will flood the market as former NYSE seat holders cash in their ~80,000 shares. Reality is that these seat holders have considerable lock-up restrictions on their share of NYX volume.

The NYX s-4 Filing clearly lays out these restrictions. Here again is what the filing says regarding lock-up restrictions:

(Source: S-4; Page 136 of S-4. Click here to read filing.)

"Lock-Up of NYSE Group Common Stock

Each of General Atlantic, Goldman Sachs Group and GSP agreed in the support and lock-up agreement not to sell or transfer any shares of NYSE Group common stock that they receive in the mergers for a certain period of time after the completion of the mergers. We refer to this period of time as the “lock-up period.” For GSP, the lock-up period expires on the first anniversary of the completion of the mergers, but GSP is permitted to pledge, hypothecate or gift to charity its shares of NYSE Group common stock during this lock-up period. For General Atlantic and Goldman Sachs Group, the lock-up period is the same as that of the NYSE members and expires as follows:

•

with respect to one-third of their shares of NYSE Group common stock, on the first anniversary of the completion of the mergers;

•

with respect to another one-third of their shares of NYSE Group common stock, on the second anniversary of the completion of the mergers; and

•

with respect to the remaining one-third of their shares of NYSE Group common stock, on the third anniversary of the completion of the mergers.

So, Ms. Silva's notion that the market will see a flood of supply that theoretically will out pace demand, thereby creating pressure on NYX's share price, is off base.

First, shares that will be sold by former NYSE seat holders have significant lock-up restrictions. They can't sell all of their shares at once as Silva's article may lead readers to believe.

Second, Ms. Silva goes on to discuss the often referenced PE ratio of NYX as it compares to peers in its industry. Price/Earnings is a poor measure of a company. This holds true for many reasons. One such reason includes the relative ease of using GAAP to manipulate earnings numbers. For this reason (and others), Price/Book is generally a more accurate indication of a company's valuation.

The WSJ's Steve Gelsi reported on 3/8/2006 that the NYX looks undervalued on a Price/Book basis. He writes: (click here for article [subscription to WSJ required])

"The NYSE Group's price-to-book value will be 9.1, lower than the 20.4 for Nasdaq, 15 for IntercontinentalExchange, 9.8 for the CBOT, and 13.4 for the Chicago Mercantile Exchange"

Click here for a concise review of Price/Book.

Analyst Scorecard (Click Below For Larger Image)

2006-03-15T15:24:00.000-05:00

More from the UK on NDAQ's LSE Bid

2006-03-14T22:49:00.000-05:00

In this piece, The Daily Telegraph discusses Clara Furse's (LSE CEO) insistance for JP Morgan to step down from their role as investment banking advisors for NDAQ. The end of the article says,

"Nasdaq faxed its offer to the LSE at 4pm on Thursday but Furse had already left for the weekend.

She took part from Morocco in a conference call held by the board to discuss the deal, which led to the decision to reject it.

JPMorgan said: "As a matter of policy, we do not support unfriendly approaches for corporate broking clients and have stepped down as adviser to Nasdaq."

London's Perspective of NDAQ's LSE Bid

2006-03-11T22:22:00.000-05:00

The UK's Daily Telegraph ran a story today regarding the NDAQ bid for LSE (click here for the story). It's interesting that NDAQ demanded in it's faxed offer letter, that the LSE respond "formally."

One can't help wonder about such a demand. What benefit could NDAQ derive from a formal response? Maybe the answer is evidenced by NDAQ's share's getting a lift once LSE's response hit the wires.

Here's a highlight from the Daily Telegraph's piece today:

"He [NDAQ CEO, Bob Griefield] has also managed to anger the LSE management and advisers with the style of his approach, delivered by an abrupt fax on Thursday which included a demand for a formal response. For a supposedly hi-tech company to use the fax raises a giggle."

Secondaries and Details on NYX Lock-up Restrictions

2006-03-11T10:39:00.001-05:00

To be sure, the upcoming secondary has many wondering what the potential near-term impact is for NYX shares. Of course there's no way to predict what the market's reaction will be, but we can look at an example of a highly publicized secondary, and the near-term reaction of the market.

GOOG was priced at $295/share and the closing price on the day of the secondary was $303 (click here for source). They issued 14,159,265 shares (a number they chose to correspond with Pi).

On 9/9/05 GOOG closed at $299 as the market anticipated the secondary. The secondary occured on 9/13/05. Here's how volatile GOOG was in the period surrounding its secondary:

9/09/05: $299 Volume = 4,390,500
9/13/05: $311 Volume = 10,299,900
9/16/05: $300 Volume = 7,579,800
9/23/05: $315 Volume = 8,483,800

SIX MONTHS LATER
3/10/06: $337

Articles from Lucchetti and quips from Reppetto and Herr help foster the notion that the secondary is something for investors to be cautious of. However, history shows these guys create drama that ultimately amounts to being a waste of time and focus.

Friday's news about NDAQ's failed bid for LSE serves as the latest fodder for drama about the NDAQ/NYX competition. It's just that though -- drama.

Sorry, getting back to the lock-up restrictions. Here's some information about the lock-up restrictions:

DESCRIPTION OF NYX LOCK-UP RESTRICTIONS

On page 136 of the NYX s-4, the NYX lock-up restrictions are described. Here's an exerpt:

"This section of the document describes the material terms of the three support and lock-up agreements entered into by certain Archipelago stockholders as described below. The following summary is qualified in its entirety by reference to the complete text of the support and lock-up agreements, which are incorporated by reference into, and attached as Annexes B, C and D to, this document. We urge you to read the full text of each support and lock-up agreement.

Concurrently with the signing of the merger agreement, the NYSE entered into separate support and lock-up agreements with the following parties or groups:

•

General Atlantic Partners 77, L.P., GAP-W Holdings, L.P., GapStar, LLC, GAP Coinvestment Partners II, L.P. and GAPCO GmbH & Co. KG (which we refer to collectively as “General Atlantic”);

•

GS Archipelago Investment, L.L.C., SLK-Hull Derivatives LLC and Goldman Sachs Execution and Clearing, L.P. (which we refer to collectively as “Goldman Sachs Group”); and

•

GSP, LLC, which is an entity affiliated with Gerald D. Putnam, the chairman and chief executive officer of Archipelago.

The support and lock-up agreements were amended and restated as of July 20, 2005. Together, the support and lock-up agreements cover an aggregate of 18,870,405 shares of Archipelago common stock beneficially owned by the entities listed above, which as of June 30, 2005, represented approximately 40% of all of the issued and outstanding shares of Archipelago common stock on a fully diluted basis.

Agreement to Vote with Respect to Archipelago Common Stock

In the support and lock-up agreements, each of General Atlantic, Goldman Sachs Group and GSP agreed to vote all of its shares of Archipelago common stock (subject, to the extent applicable, to certain limitations on voting set forth in the Archipelago certificate of incorporation) in favor of the mergers and the merger agreement and against:

•

any other acquisition proposal (as defined in the merger agreement) with respect to Archipelago;

•

any proposal for any merger, consolidation, sale of assets, business combination, share exchange, reorganization or recapitalization of Archipelago that is in competition or inconsistent with the transactions contemplated by the merger agreement;

•

any liquidation or winding up of Archipelago;

•

any extraordinary dividend (other than any dividend expressly permitted by the merger agreement) by, or change in the capital structure of, Archipelago (other than any change in capital structure resulting from the mergers or expressly permitted by the merger agreement); and

•

any other action that would reasonably be expected to impede, delay, postpone or interfere with the transactions contemplated by the merger agreement or result in a breach of the representations, warranties, covenants or agreements of Archipelago under the merger agreement that would reasonably be expected to materially adversely affect Archipelago.

Each of General Atlantic, Goldman Sachs Group and GSP also agreed that, if the merger agreement is terminated under any circumstance in which the termination fee and expense reimbursement would be payable by Archipelago under the merger agreement, then, for 15 months following this termination, the stockholder would not transfer any of such shares of Archipelago common stock held by such stockholder, and it would (subject, to the extent applicable, to certain limitations on voting set forth in the Archipelago certificate of incorporation as described under “The Special Meeting of Archipelago Stockholders—Voting Limitations”):

•

vote all of its shares (subject, to the extent applicable, to certain limitations on voting set forth in the Archipelago certificate of incorporation) against any acquisition proposal for Archipelago at any annual

or special meeting of Archipelago stockholders or in any other circumstance in which a vote, consent or other approval is sought (however, this obligation does not apply to GSP if it had voted in favor of the mergers); and

•

refrain from encouraging, facilitating or supporting in any way any such acquisition proposal or any proposal that would reasonably be expected to lead to any acquisition proposal for Archipelago.

The aggregate number of shares of Archipelago common stock subject to this requirement to vote against any acquisition proposal during this 15-month period cannot exceed 30% of the Archipelago common stock issued and outstanding as of the date of the vote.

Restriction on Transfers of Archipelago Common Stock

In general, General Atlantic, Goldman Sachs Group and GSP agreed not to sell, pledge or transfer any of their shares of Archipelago common stock at any time during which the above voting obligations apply. There are two exceptions to this obligation under the support and lock-up agreement for GSP:

•

first, prior to the completion of the merger or termination of the merger agreement, GSP is permitted to pledge, hypothecate or gift to charity up to 301,212 shares of Archipelago common stock, as long as the value of these gifts, determined based on the closing price of Archipelago common stock on the date on which the gift is made, do not exceed $750,000 in the aggregate; and

•

second, if the merger agreement is terminated under any circumstance in which the termination fee and expense reimbursement would be payable by Archipelago under the merger agreement, GSP may pledge, hypothecate or gift to a charity its shares of Archipelago common stock during the 15-month period, if applicable, during which GSP is obligated to vote against any acquisition proposal for Archipelago.

Lock-Up of NYSE Group Common Stock

•

with respect to one-third of their shares of NYSE Group common stock, on the first anniversary of the completion of the mergers;

•

with respect to another one-third of their shares of NYSE Group common stock, on the second anniversary of the completion of the mergers; and

•

with respect to the remaining one-third of their shares of NYSE Group common stock, on the third anniversary of the completion of the mergers.

The NYSE Group board of directors has the right to remove the transfer restrictions imposed on General Atlantic, Goldman Sachs Group or GSP. If it exercises this right, or if it removes the transfer restrictions on any shares of NYSE Group common stock received by the NYSE members in the mergers, then the NYSE Group board of directors is required to simultaneously remove the transfer restrictions from a proportionate number of shares of NYSE Group common stock held by General Atlantic, Goldman Sachs Group and GSP. This matching right to release also applies to shares held by General Atlantic if the NYSE Group board of directors releases certain shares held by Goldman Sachs Group, and to Goldman Sachs Group if the NYSE Group board of directors releases certain shares held by General Atlantic. Similarly, if the NYSE Group board of directors removes the transfer restrictions on any shares of NYSE Group common stock received by General Atlantic or Goldman Sachs Group in the mergers, then the transfer restrictions automatically will be be removed from a proportionate number of shares of NYSE Group common stock held by the former NYSE members."

NYX = Global Leader

2006-03-10T15:25:00.000-05:00

NYX had an amazing first day of trading. The stock rocketed to 88 the next day, and since then there's been a spattering of profit-takers cashing in their gains. The sellers are most likely those AX shareholders that are satisfied with their impressive returns, and short-term traders that are booking nice gains since Tuesday's AX close at ~$64.

The interest in NYX has been tremendous judging from our volume. With volume comes plenty of folks that just are not familiar with the opportunities that NYX now has. Those folks give buying opportunities to those aware of the incredible potential that NYX has.

The seatholders (who are absolutely aware of the NYX potential) mostly took their $300k in stock which indicates that they, for the most part, understand the long-term growth potential for NYX.

NASDAQ TRIES (and Fails) AGAIN

That said, today there was some news on the wire around 12:15 PM EST. The headline was that the LSE rejected a takeover bid by NDAQ. A subsequent article in the WSJ rambled about NDAQ's bid and the liklihood that NDAQ would come back w/another offer.

The reality is that NDAQ has failed in Europe. They've been down the road of trying to purchase LSE before. Click here to read about their failed effort in 2000. Click here to read about their collossal waste of money with Nasdaq Europe.

The market jumped on the idea of a tie-up between NDAQ and LSE. NDAQ's stock price soared over 10%. Volume for NDAQ also soared. These are clear indications that, for the most part, the market is scratching their collective head to figure out who the real leader in the exchange world is.

It's clear to ArcaNews that the leader is NYX. The confetti is settling on Wall & Broad, and it won't be long until the NYX begins executing its plans. Plans which include broadening its revenue base, acquiring other exchanges internationally, and cutting costs thereby expanding margins.

Ben Graham's insight comes to mind. "In the near term the market is a voting machine, and in the long run it's a weighing machine."

As ArcaNews has said all along: In the long run, NYX tips the scales.

Misleading Info from Lucchetti; The Real Skinny About the NYX IPO

2006-03-02T09:06:00.000-05:00

(update added regarding Lucchetti's actual statement in today's WSJ, link to S-4 that doesn't require login information, and link to the press release mentioned below)

Before getting into the latest misleading information that Lucchetti's written, I want to take a minute to say CONGRATULATIONS (once again) to everyone at Arca and at The Big Board for making it through the regulatory, political, and just outright, circuitous obstacle course that has lead to the closing of what is arguably the most dramatic, landscape-shifting deal in Wall Street's history -- truly!

When the closing bell rings on March 7th, it will be a bittersweet chime. Bittersweet because it will mark the end of Arca as a stand-alone enterprise. However, the Porshe engine that is ArcaEx has now been installed in a Lincoln Town Car (the NYSE), and the merger of these two amazing companies will lead the future of bourses globally. And that's where the sweet part of bittersweet comes in.

Perhaps the rock group Semisonic put it best, "Every new beginning comes from some other beginning's end."

So onward and upward we go. John Thain puts things eloquently in his press release announcing the SEC's approval. He says, "This will mark the beginning of a new era for the Exchange and America’s financial markets. As a for-profit, publicly held company, the NYSE Group will be better positioned to grow, create value and compete globally. We will provide customers with more choice in trading, an advanced technology platform, a broader product mix, and listing opportunities among a wider group of companies. This is an exciting and historic time for the entire Exchange community, our Archipelago partners, our customers, our future shareholders and America’s investing public."

LUCCHETTI ARTICLE

Ok, on to Mr. Lucchetti's article in today's WSJ.

Guessing by the number of folks in the AX bleachers (Y! Finance Message Boards) who have asked about how shares of AX will convert to shares of NYX, there seems to be some confusion. WSJ reporter, Aaron Lucchetti perpetuates this confusion in today's WSJ. He writes:

"The initial batch of stock will be distributed to NYSE seat holders and employees and Archipelago staff under terms of the companies' merger. The secondary offer could raise $1 billion to $2 billion, depending on how many Big Board seat holders decide to sell some of their shares in the new company."

So, folks who read that may gather that the initial NYX stock will be held solely by NYSE seat holders and employees of AX and NYSE. He even concludes that the secondary offer is contingent on how many Big Board seat holders decide to sell their stock. This is misleading and not accurate.

The reality is, that AX shareholders, NYSE seat holders, and employees of AX and NYSE will own (and do own) the initial batch of NYX stock.

As stated in the S-4, one share of AX will convert to one share of NYX. Please click here to view this SEC filing, and then go to page 12. At the top of page 12 (the first question on the page), it clearly states:

Q: What will I receive in the mergers if I am an Archipelago stockholder?

A: If you are an Archipelago stockholder, you will be entitled to receive in the mergers one share of NYSE Group common stock for each of your shares of Archipelago common stock. If you hold any Archipelago stock options to acquire
Archipelago common stock, you will receive options to acquire an equal number of shares of NYSE Group common stock.

So, Lucchetti's lack of insight perpetuates the notion that the NYX is having an IPO in the traditional fashion. It's clear that there are a substantial number of investors that are totally clueless about their ability to own NYX today, by having their AX shares convert to NYX shares on 3/8. If one relies on getting information from places like WSJ, CNBC, Bloomberg, and The Nightly Business Report, one gets the idea that the NYSE is going public in the same manner that most companies go public. The message that the NYSE is having an IPO is somewhat misleading. Misleading because there seems to be a lack of emphasis on the fact that AX will convert directly to NYX.

Next week will probably be chock-full of stories that mislead folks to believe that to own NYX they need to wait until 3/8, when the NYSE "goes public." There's already discussion about the high demand for NYX when it opens for trading. Thing is, it's already open for trading -- under the ticker "AX."

Market Share Jitters Nothing New

2006-02-17T13:53:00.000-05:00

History tends to repeat itself.

Lately, there have been numerous articles and analyst comments regarding NYSE losing market share in terms of trading its listed company's stocks. This post is about how this fear also existed 32 years ago. But before getting into that, I just wanted to note that the market share numbers that are generally cited include extended hours trading. This is a time of the day where NYSE market share in listed stocks doesn't move the needle. During the regular session, NYSE market share is right around 80% -- impressive by any measure. But more interesting than that is how in 1974, the exact same threat of eroding market share existed. But before getting into the thoughts of Robert Haack (president of the NYSE in 1974), lets look at some of the recent press.

On 2/07/06, Reuters wrote a story with the headline, "NYSE market share weakens for 7th straight month." In this article, the author writes, "The New York Stock Exchange's dominance of trading in NYSE-listed stocks weakened for the seventh straight month in January. . ."

In fact, just yesterday Megan Davis of Reuters published a story that says, ". . .And the erosion [of market share] is far from over, some industry experts believe. Some analysts see the market share of rivals rising to 35 percent before midyear, when the NYSE rolls out its counterpunch -- the so-called "hybrid" market model combining electronic trading with traditional open outcry." Nasdaq's CEO, Bob Greifeld is quoted in this article, saying, "As we gain market share, our credibility as an alternative listing venue increases."

32 YEARS AGO
Robert Sobel's, "A History of The New York Stock Exchange: 1935-1975" documents how the same fears about eroding market share existed in 1974. Towards the end of the book there's a chapter about NASDAQ. In this chapter Sobel writes about a speech delivered on 11/17/1970, by Robert Haack entitled,"Competition and the Future." During this speech Haack said, "As recently as 1967, the regional exchanges and the Third Market combined to account for just over 10 percent of all trading in our listed stocks. . . Today they account for almost 20 percent. . .Available data indicate a significant loss of block trades, with an estimated 35 percent to 45 percent of 10,000 shares or more traded away from the New York Stock Exchange." The reasons for this, and the most important was the "presence of antiquated and unequal rules and the emergence of a new environment for trading in securities." (Sobel, 1975, p.355).

Cream rises, and the NYSE has proven through the centuries that it evolves and retains its leadership position. Leadership in terms of market share and mind share. In the near term, market share ebbs and flows, but when the dust settles and ArcaEx and Hybrid are firing on all cylanders, the discussion will turn to market share in revenue streams that today are non-existant for the Big Board. Through AX/NYSE synergies there will be an emergence of market share for the NYX in categories that today their share stands at zilch. Exchanges that trade ETFs, options, and bonds will likely see their market share decrease as the NYX enters their markets.

So, the point of this post is simply to point out that through the ages there've been changes in the national market structure that've elicited threats of market share declines for the Big
Board. Ultimately though, the NYSE has always emerged as a leader.

History tends to repeat itself.

Arca turns in an amazing quarter!

2006-02-01T10:32:00.000-05:00

Yesterday's conference call was monumental. It was the last earnings call for Archipelago Holdings as a seperate entity. The results for the quarter were outstanding. In fact, once merger costs are taken out, AX beat the Street by three cents!

The takeaway from the WSJ article is:
"Excluding merger costs and related executive compensation of $34.7 million, Archipelago said it would have earned 28 cents in the latest quarter. Analysts polled by Thomson First Call had estimated earnings of 25 cents a share."

Once again, AX's extremely talented management team has continued to deliver substantial shareholder value. And for that matter, they've continued to deliver significant value to its customers. This is evidenced by the growing of Listed, AMEX, Nasdaq, and options market share. The share data regarding Nasdaq for the 4Q reflects a pricing model that the Nasdaq had until they realized that their model lacked any real business sense. Subsequently, there has been an uptick in Nasdaq market share for Arca since Nasdaq adjusted its prices upwards.

It's worth noting a couple of the analyst comments from yesterdays call. The call may be heard here. At approximately 28 minutes and 40 seconds into the call (you can move the playhead of the media player to get directly to this point of the call) Richard Herr from Keefe, Bruyette, & Woods demonstrated his poor understanding of AX. He asks a question about declining market share, but management quickly helped Mr. Herr understand the numbers he was looking at. The numbers he alluded to are actually a positive for AX -- not a negative as he initially concluded.

Since this is the final conference call for Arca as a stand-alone company I'd like to thank and congratulate all of the devoted employees of Archipelago who have worked incredibly hard to build a revolutionary bourse. So revolutionary is this bourse, that the NYSE has agreed to merge with it. This merger represents the biggest structural change Wall Street has seen since the advent of telephones on the floor.

And, the technology that Arca brings to the party is second to none. It is an engine that inherently has unmatched capacity, speed of execution, and economies that scale like wild fire!

Congratulations Arca on all of your success!

2006-01-15T10:57:00.000-05:00

The dark ages

General Putnam the Quintessential Entrepeneur!

2006-01-12T14:12:00.000-05:00

Putnam is an awesome businessman. And I've never seen "Ivy League Schools for Dummies." He's obviously a very smart man. The alleged character flaws being banterred about in the NYX bleachers (i.e. Y! Finance message boards) are without merit.

Honestly, the executive management team at the NYX is unrivaled. No other exchange has the caliber of generals that NYS does.

As for personal attacks and accusations against Mr. P -- they're really not appropriate! It sounds like sour grapes and jealousy. Speaking of sour grapes:
Q: What happens when you step on a grape?
A: It lets out a little w(h)ine.

I think someone slipped goofy pills in my coffee this morning. Sorry for the jokes, but I hope you can use them.

WSJ's Blunderful Lucchetti

2006-01-10T10:03:00.000-05:00

Today, WSJ reporter Aaron Lucchetti has drafted an article about the NDAQ acquisition of Shareholder.com. The only message that this article conveys is that Lucchetti's agenda involves taking aim at the NYX.

My favorite part of today's dose of bearcrap, is in his last paragraph. Here he writes, "The Nasdaq moves may help counter the NYSE's advantage with executives curious about their why their company's stock price is moving."

Could this be evidence that Lucchetti somehow bypasses the WSJ editorial team? To be sure, ArcaNews has its share of typos, but ArcaNews is certainly no Wall Street Journal. As a WSJ subscriber, at the very least, I expect cohesive sentences!

Lets not get hung up on that stuff though. The reason for this post is simply to point out how Lucchetti, again, tries to conjure up some story based on trivial news items. First, he tirelessly scribed articles about one dissident shareholder that never amounted to anything. Now he turns his attention to a meaningless acquisition by NDAQ.

Today's announcement from NDAQ about their purchase of Shareholder.com highlights NDAQ's relatively weak management team. What does NDAQ forecast their ROI to be with this acquisition?

Meantime, another metaphoric coat of paint has been laid. As we watch the final coat of paint dry, silly little stories like the one Lucchetti whipped up this morning, are merely sideshows.

Seems like we should be hearing shortly about plans regarding the anticipated AX-to-NYX ticker change, and the implicit IPO of the NYSE that this change represents. There truly aren't many more hurdles left in this obstacle course. . .

The Whirling Windbags Are At It Again

2006-01-05T13:03:00.000-05:00

Catalysts for damaging investors such as Sandler O'Neil's Dick Reppetto (read: "repeat-o"), are babbling again. This time our ole pal, Aaron Lucchetti's holding the microphone. If ever there's a need to perceive a glass as half-empty, these are the clowns to go to. To be sure, they've been wrong with their insight for years.

Literally, since the 4/20/05 announcement, these bozos started in with negatives -- inking prose about Langone and dissident NYSE members who would thwart what may become known as the most revolutionary deal to ever occur in the US equity market structure. They babbled for months leading up to the 12/06/2005 vote (which passed by a landslide and left pie all over Lucchetti's face [and consequently, WSJ's]). Maybe the new chief of Dow Jones will examine Lucchetti's nonsense, and realize that they guy is suited to write cartoons -- nothing serious like articles in the WSJ. Not to get off track, but honestly, Lucchetti has been consistantly wrong for a long time. Why does Dow Jones bother giving him space?

Also consistantly wrong, are Reppetto, Chamberlain, and Herr (to name a few misguided analysts that've lost mega bucks for their firms customers due to their bone-headed mosaics. I'll get back on track in a second. If you listen to the conf. call from the 3rd quarter, you'll here an analyst (who I'm reasonably sure was Repetto) ask Jerry Putnam for guidance on how to look at AX and for meaningful metrics to help with his analysis. If that doesn't scream, "I'm baffled," I don't know what does.

I've listened to many earnings calls, but have never heard an analyst ask the CEO for that kind of information. He basically asked Putnam to do his job. Ok, getting back.

Let's look at Lucchetti's latest babble. In today's WSJ he takes his usual pessimistic vantage point. Lucchetti writes, "While the exchange sold more trading rights than it had anticipated, the price was an 18% discount from the $60,000 that nonmember traders had been paying to lease a seat for a year."
(quick clarification on Lucchetti's pessimistic nonsense: ArcaNews spoke with the NYSE this afternoon to clarify the actual number of seats that were active. NYSE said that the number of active seats was between 1100 - 1150; Lucchetti The Pessimist, of course, goes with the 1150 number to make the 1274 seats sold appear fewer. Why not use 1100 - a much rounder number?)

Well here are factual numbers. No spin, no hidden agenda, just the fact-jack!

$60,000 x 1100 memberships =
$66,000,000

Actual selling price/seat =
$49,290

Actual number of seats sold =
1274

Actual revenue realized =
49,290 X 1274 = $62,795,460

Net Difference between revenue from old license fees and latest license fees =
$66,000,000 - $62,795,460 = $4,978,290 or 4.8%

Repetto, Chamberlain, Herr, Lucchetti in a different profession =
PRICELESS

A tremendously different picture emerges with the aforementioned factual data. Stating that there was an 18% discount, is nothing more than spinning things to make a bearish case -- what a bunch of "bearcrap."

One more thing to clarify: Dick Repetto is quoted in Lucchetti's article as saying,"This [the difference between membership revenue from old structure to new structure] is not an optimistic omen for making money on the floor."

What in the world is he talking about? Getting more customers (read: seat holders) is absolutely optimistic. If they had sold fewer licenses than seats, that might not be an optimistic omen. Thing is, that's not what happened. The NYSE sold more licenses than they had active seats. This clearly means that the NYX has more active customers now than the NYSE did just a month ago. Dick, isn't that optimistic? Lucchetti?

More customers means greater liquidity and order flow. That translates to increased revenue, and expanded gross margin percentages (assuming costs stay flat while revenue increases).

Lucchetti and Repetto's heads are so far up their proverbial keesters, that they think their crap is worth sharing with others. If you're gonna keep your head up your keester, keep it to yourself, nobody else cares about your crap.

And, for goodness sakes, please stick to the facts.

NYSE Seats Sell For $49k/Year

2006-01-04T12:01:00.000-05:00

The NYSE announced this morning that they've sold 1,274 trading licenses at an annual price of $49,290. This represents annual recurring revenue in excess of $60mm. And the deal hasn't even closed yet!

To put that recurring revenue in context, it helps to look at NDAQ's income statement. In 2004, the NDAQ had revenue of $540mm. This means that the first transaction that the NYX has completed will result in ~11% of NDAQ's 2004 total revenue. That $60mm also represents ~65% of NDAQ's free cash flow.

This is awesome by any measure. .

One site off the road ahead

2005-12-30T22:58:00.000-05:00

Consider the potential revenue that the NYX will be deriving from selling seats:
(using the average of the minimum and maximum seat prices)
$61,612.50/seat x 1366 seats = $84,162,675 to the top line -- and that's recurring revenue that'll likely scale with inflation.

It could be interesting if NYX shareholders one day agree to issue more than 1366 trading licenses (i.e., seats). The incremental costs to the NYX are small per each additional license it may issue.

The other revenue rivers like data feeds (again, wonderful economies-of-scale) will be recurring and predictable.

Meantime, global expansion is afoot. Same way that costs for sending email internationally are marginal, sending buy and sell orders electronically has incredibly low costs and huge margins.

And, among other things, the NYX is instantly getting into the options and ETF games. Market share that has nowhere to go but up, and listings that are migrating to their system (like 40 iShares Barclays has moved over).

History is for losers

2005-12-30T09:13:00.000-05:00

After 213 years of being run as a non-profit organization, the NYSE, with the assistance of Arca, is finally being transformed to a for-profit, publicly-held, enterprise.

The NYX nay-sayer with the loudest microphone has been WSJ reporter, Aaron Lucchetti. He scribed numerous articles suggesting that the NYSE seatholders would have a hard time voting in favor of the NYX deal. For the months leading up to the 12/06/2005 vote, Lucchetti insisted that litigation, Langone, and Higgens would strong-arm other NYSE members into voting against the terms of the deal.

While Higgens wasted millions of dollars on his pathetic lawsuit, Lucchetti wasted valuable space in the WSJ, as well as the time of WSJ readers.

That said, Lucchetti drafts a mini-history of the NYSE in todays WSJ. And, his research is truly interesting to note.

The following is based on some of Lucchetti's research:

* Since the NYSE was founded in 1792, members have paid for the ability to trade on the NYSE. Memberships were known as seats since the early 1800s, when members sat in assigned chairs and stood to trade when stocks were called by an auctioneer.

* In 1868, the NYSE had a mere 533 seats. Folks seeking NYSE memberships could only obtain by purchasing a seat from an existing NYSE member. In 1952, following numerous increases in the supply of memberships (i.e., seats) the NYSE settled on having 1,366. By this time, "seats" went the way of carbon copies. Children today may ask what "CC" stands for in email sending options. And adults answer that long ago, we used carbon paper to make copies -- the name carbon copy stuck. Same with "seats." The name has stuck. And Thain has said publicly that he is committed to preserving the tradition of calling memberships "seats."

* In 1929 a seat sold for $625,000 (inflation-adjusted), an amount equal to more than $6 million today. For years, seatholders actually voted on applicants. Much like many fraternities during rush-week, members ("brothers"), actually voted by placing marbles in a box. Through the years, this fraternal entrance process has changed from a committee, to eventually, NYSE staff.

* In 1963, The US Supreme Court ruled that the NYSE could not reject memberships without fair procedures. Today, it can take months for a membership to be approved. Prospects must prove fiduciary soundness, a rich understanding of the markets, and other things in order to be admitted to the "club."

* The NYSE constitution that is kept in a locked credenza on the exchange's sixth floor is chock full of signatures from NYSE seatholders through the ages. Among the signatures are John D. Rockefeller's from 1883 and J.P. Morgan Jr.'s from 1895.

On 10/10/1953, the volume on the NYSE was 900,000 shares (the last time there was fewer than 1m shares traded for the day). 52 years later, billions of shares trade each day the market's open.

Today marks the end of one of capitalism's greatest traditions. However, it also stands to mark the beginning of one of capitalism's greatest technological advances. Colombia professor, Kenneth Jackson, the author of the Encyclopedia of New York (and other books), says, "History is for losers." His point is, evolution and advancments often occur at the expense of preserving tradition.

Today, Jackson's words ring in tandem with the closing bell.

How shorting against the box can hurt

2005-12-29T16:01:00.000-05:00

There's a fairly good chance that the sell off since our 12/06/2005 vote to allow the NYX deal to close, can be largely attributed to seatholders -- that will receive ~80,000 shares of NYX within a month or two -- who are selling AX short.

The rationale is that since there will be lock-up requirements imposed on the NYSE-turned-NYX shareholders, why not sell the stock short now and use some of the 80,000 shares to cover if necessary. It's an arbitrage play -- and a pretty obvious one.

But, here's the thing. Tax law changes from 1997 can treat profits derived from these short positions (or tax advantages derived from these short positions) as short-term gains. And, short-term gains are not typically desirable for investors (see this article).

The pressure that's been put on AX shares since the deal's approval represents "artificial selling." However, in the stock market, a sale is a sale is a sale.

While the giddy NYSE seatholders lock in their impressive gains, little retail investors may get burned. It's hard to squeeze a short that's got 80,000 shares to cover with. And, if 1366 seatholders sold 80,000 shares short, that'd be 109,280,000 worth of shares being sold.

Of course, we know that the aforementioned hypothetical situation is not happening, but even a small fraction of the 109,280,000 will put extraordinary pressure on AX shares.

And, unlike typical short covering, when these short-sellers go to cover their short -- they don't need to actually purchase stock -- they own it already!

This phenomenon helps to explain the spike in daily share volume since 12/06/2005. It also explains why seats are selling for ~$25k below their all-time high. This arbitrage strategy is attractive to some investors with deep pockets.

Raymond James' Vinciquerra Latest Passenger on The Short Bus

2005-12-07T16:53:00.000-05:00

It looks like Raymond James & Associates analyst Michael Vinciquerra decided to give making a call in the market another shot -- seeing as though he's been wrong about Arca each time he has published a report.

Most recently, May 4, he decided to slap an "underperform" rating on the stock. For accountability sake, AX closed on May 4, 2005 at $33.88. Today AX closed at ~$55 -- the stock is up ~60% from his pathetic little downgrade.

Vinciquerra, Reppetto, Chamberlain, and Herr -- most notably -- have pie all over their faces. They've lost their customers mega-bucks, and still continue to draw a paycheck from their employers. Honestly, a 6-year old could be just as wrong! It's amazing that buy-side PMs would actually pay attention to these analyist's idiotic discourse, let alone act on their reports.

Vinciquerra, et. al. keep coming back to market share for NYX. They need to open their collective eyes and realize that the game's changed. They can't apply their math skills in a spelling bee -- financial exchanges are radically different now than they've ever been, and this transformation is literally just beginning.

There's more to the NYX business model than there's ever been to that of the NYSE. There will be revenue streams that have never existed for the exchange before. Costs will be cut enormously, and margins will grow.

To be sure, the economies of scale that exist with NYX are, in-and-of-themselves enough to get excited about. Can any of these analysts talk about the incremental costs involved in collecting revenue from new listing requirements for smaller companies -- you know, the kind that traditionally have gone to the Nasdaq.

NYX will grow its market share, not only among its listed companies (which it essentially has a monopoly on), but it will grab share from Nasdaq in terms of OTC stocks. They've already gained considerable share from the AMEX, in terms of ETF listings.

Options, futures, bonds, PC computing power are all revenue streams that these analysts neglect to talk about. Do they think NYX will actually lose market share in options? ETFs? Futures? Bonds? Come on! These are things that currently stand at 0% market share for NYX -- that means that there's only one direction to go (in case these bozos read this, let me spell it out so you can understand). . .U-P!

Today's action was the ole voting machine. Eventually, cream rises (as it has), and the NYX will stand on its own merit. These anal-ists already look like knuckleheads. History has proven that they're clueless about NYX. But once the NYX starts firing on all cylanders, and management focuses on executing a business plan (not focused on the largest deal in US equity market structure history), then, just then, these anal-ists will join the likes of Henry Blodget -- crap that just gets flushed down the toilet (and into other professional endeavors).

Timing for Release of Vote Outcome

2005-12-06T09:05:00.001-05:00

Timing for Release of Vote Outcome

2005-12-06T09:05:00.000-05:00

It's hard to believe that it's already December 6! The jungle of nonsensical conjecture that has been ubiqitious since April 20, 2005 (when the NYX deal was announced) must now give way for facts. The fact of the matter is that this afternoon the 1366 NYSE members are scheduled to vote on the NYX deal. Recall, guesses towards the outcome of this vote have been a distraction from the day after the deal was announced and LongGone ("Langone") and Higgins started to rebel, and make public stooges of themselves. WSJ reporter, Aaron Lucchetti, has used the vote as a mechanism to spread bearish speculation (his bucketheaded articles are documented here at ArcaNews, and if you want a chuckle, re-read some of his commentary over the last several months). As cited here at ArcaNews, NewsWeek got into the bearish-outcome game, as did a rash of anal-ists (is that an anal rash?). But, 95% of what's been published about this deal since April 20, 2005, is bearshit, and purely conjecture.

Today, facts shall prevail.

ArcaNews spoke with representatives at the Big Board this morning (in the Secretary's office). It was learned that the members will report to Wall & Broad at 4:30 PM EST. They are expected to meet for no longer than 30 minutes. Upon the close of the vote this afternoon, the Inspector of Elections will issue a preliminary result (assuming that the vote is not very close, and he can determine the outcome with reasonable certainty). It doesn't sound like the Inspector of Elections will quantify the results today, but it does sound as though he will announce the unofficial results today -- probably around 5:00 PM EST.

This result will be made public, and tomorrow morning when the Inspector of Elections returns to his office, he'll conclude an official tally. This official tally will then be released to the public.

The Profile of A Poor Sport

2005-12-01T14:16:00.000-05:00

At this point, one week before the official vote, with seat prices hitting new all-time highs, and GS, Lazard, and Citi have concluded that this deal (in its current structure) is fair, Bill Higgins continues to shine the light on himself.

First, his pathetic little law-suit was merely a trivial excercise that became ammunition for the nay-sayers out there - Noteably, Lucchetti, Weber, Ruppetto, and Chamberlain. To be sure, they wasted valuable space in the WSJ as well as wasting the time of their readers. Their conjecture has time-and-time-again, proven to be nothing more than merely a bunch of hollow-sourced articles, misleading mosaics among a few anal-ists, and fodder for those interested in the largest deal to effect the structure of the US national equity and deriviatives structure in history.

To be sure, the Higgins lawsuit was ineffective. His re-assessment of valuation was a collossal waste of money and time. And his demand for NYX to pay his legal fees is simply laughable. But today's story from Reuters takes the cake.

Higgins employed a firm by the name of Willamette Management Associates -- hardly a name on Wall Street, hardly a name recognized multi-nationally, and hardly a company anyone in the US is familiar with.

Just surveying the company's website is enough to indicate that they're small players. Compare the websites of Citi, Lazard, and GS to that of Williamette Management Associates. Just the appearance and content on these sites indicate what level these firms are on. Citi, Lazard, and GS, are global leaders in investment banking -- arguably the top in their field. They hire ivy-league MBAs, utilize topgrading in staffing, and simply attract the top talent. On the other hand, Williamette, is a small shop with inferior talent (oxymoron?).

Their opinion that Citi, Lazard, and GS never explain why the deal is fair to shareholders is pathetic and indicates an extreme level of desperation for Higgins to try and save face.

At this point, the only thing William Higgins has been successful in doing (related to the NYX deal, that is), is drawing attention to what a litigious, arrogant, and misguided person he really is. Other NYSE seatholders may already know him and have their opinions of him, but to the rest of the world -- that don't know him other than from his ridiculous antics with the NYX deal -- it's fairly easy to develop an opinion of his character.

And, that speaks for itself.

Real News: NYX to GAIN ETF Market Share!!

2005-11-30T16:07:00.000-05:00

Where's Lucchetti today? How 'bout an article about NYX growing its ETF market share? Click here for a quick note on this exciting development. ETFs are getting huge. Their assets are growing at incredible rates. In fact, according to a WSJ article on 10/04/2005, ETF assets stand at $251.5 billion, having increased $100 billion over the past year and a half!

Consider that mutual funds, the investment of the 80s, have approximately $8.5 trillion in assets. When wealth is transferred to the next generation, ETFs will be ubiquitious. Perhaps more popular than mutual funds are today.

The advantages of ETFs over mutual funds are vast. In fact, the only potential downside of an ETF instead of a mutual fund, is for investors that set up dollar-cost-averaging programs that can create trading commissions that erode ETF profits -- the solution to this? Find a broker who can sell you a wrap account. Own ETFs in the wrap account, and the trades are done commission-free.

Another nice thing about ETFs over mutual funds are the capital gains tax treatments. In a mutual fund, owners are on the hook to pay capital gains tax on shares sold by the fund to honor a redemptions (read: sale of mutual fund). ETFs have no such penalty. They're tax efficient, have incredibly low cost ratios, and will likely be the mutual fund of the future.

All this is just part of an incredible transformation of Wall Street. And, NYX is positioned to be the leading bourse in the universe. AX is effectively a Porshe engine in a 1939 Cadillac.

Fill 'er up, we've got a long way to go!

BusinessWeek Reporter Joins Others On Short Bus

2005-11-30T13:39:00.000-05:00

Dunce of the day today goes to Joseph Weber at BusinessWeek. Read his idiotic prose here.
This clown, Weber, has gone off the deep end with this article. He quotes the proven-to-be-misguided analyst, Richard Herr from Keefe Bruyette (On May 9, 2005, Herr downgraded AX to Mkt Perform. The stock closed at $32.87 that day -- today we're well over 50!).

Asking Herr's opinion about NYX is like asking Bill Buckner how to field a grounder at 1st base. Herr has consistantly proven that he's clueless. But lets not overlook that clown from Sandler O'Neil, Rich Ruppetto. This is the same guy who asked Putnam during last quarter's earnings call, if Putnam could provide him with metrics that would be meaningful to analysts, and give him a sense of how to look at NYX. Isn't that the job an anal-ist? Isn't developing meaningful mosaics what differentiates the good from the bad?

And, for the record, Ruppetto downgraded AX on 4/22/2005 and the stock closed at $29.76 that day. Again, Dick, we're over $50! Get a clue before saying anything remotely close to investment advice -- he's truly a good bed-mate for Charlotte Chamberlain. Shouldn't be long till she pipes up -- unless of course she's learned that she's indeed, without a clue.

Nonetheless, Weber decided to go to Ruppetto for insight. This one's like someone asking Helen Keller to say, "pneumonoultramicroscopicsilicovolcanoconiosis" .

The paint is drying in spite of the herd of bozos that've been putting their hands in it while it's trying to dry. Tomorrow the NYSE meet one final time before the 12/06/2005 vote.

And as for Higgens and Co. trying to tell NYX that they should pay his $18mm legal fees -- GIMME A BREAK!

Should I see if George Steinbrenner will refund my Yankees tickets from last season since they didn't win the World Series?

Keeping An Eye On The Ball

2005-11-29T12:30:00.000-05:00

Folks, keep in mind Ben Graham's axiom, "Though the stock market functions as a voting machine in the short run, it acts as a weighing machine in the long run." (Graham was Buffet's prof and one of his biggest influences while getting an MBA at Colombia University).

In the long run, AX (read: "NYX") tips the scales. History has shown that at each 0-figure the stock flirts with sellers. It happened at 30 (Idiotic anal-ists and Langone and Higgens = catalysts); it happened at 40 (we hung out between 36-40 for quite some time, while being told that the vote won't pass, that the regulators wouldn't approve of the merger, etc.). We bounced around 50 for some time given the overhang from the aforementioned. Now we're seeing the same bumper game with 60.

Events left till deal closes:
Dec. 1, 2005: Meeting among NYSE seatholders
Dec. 6, 2005: Vote among NYSE seatholders
Some time very near 12/06/2005 NYX should make an announcement that the deal will close.

Regulators have already blessed the deal. All that's left are the aforementioned factual events. The rest is conjecture among folks that are paid to create stories (anal-ists and bidness writers).

In baseball, many players miss making contact because they take their eye off the ball at the last second -- arguably the most crucial second for a batter as pitches curve, dip, dance, etc. The NYX deal is not much different. NYX stakeholders need to keep focused on the pitch.

This one has all the makings for a whopper of hit!

Lucchetti's Got Diarhea of the Pen

2005-11-29T10:09:00.000-05:00

WSJ reporter, Aaron Lucchetti, has been scribing articles that create questions, among some investors, about the strength of NYX. In August 2005 he wrote a piece in WSJ that raised doubt that the NYSE members would actually vote in favor of the NYX deal -- in its current form (i.e., the structure put forth in the S-4 filing). Re-read The ArcaNews take on this bearshit here.

Now that the facts have prevailed, and time has moved us to within about a week of the NYSE member vote, we can see things as they actually are.

The often written about, Bill Higgens case, is behind us. The only thing that came from that was about $3.5mm in fees for Citi thanks to Mr. Bill. He effectively took $3.5mm of shareholder cash and blew it on a trivial excercise of ego thumping.

Back to Lucchetti.

Today he used a lot of space for a long-winded article ab0ut NYSE market share. He takes a brief look at the history of the exchange, and clearly points out that he's disconnected from reality.

Reality is that ArcaEx is the number one electronic execution venue. Lucchetti blabs about an archaic NYSE structure giving way to traders that are looking for speed. This is something that AX shareholders have long-known, and invested in. Bringing together the top worldwide brand, for bourses, and the top trading factory, will create the 800-lb gorilla in the global marketplace.

Why doesn't Lucchetti look at the significant increases in market share among ETFs (and Barclays move entirely to AX at the expense of market share for AMEX). ETFs traded on Arca are eroding ETF market share among Nasdaq and Amex.

Arca brings ETF leadership, and market share to the table once the NYX deal closes. Arca brings trading in deriviatives such as options to the table. Futures and bonds will trade on the NYX, and Lucchetti doesn't delve into how the new NYX will be an entirely different businesses as a for-profit company.

The NYSE and AX both have been focused on the NYX deal for around the last 12 months. When the biggest deal and transformation in history is about to happen to the NYSE, it's understandable that business will pause a bit. This is a case of taking one step back in order to take 100 steps forward.

Lets look back at Lucchetti's nonsense a year from now. Lets see if he inks an article about the improvements the NYX has made in terms of market share among, not only in listed-stocks, but in OTC equitites, ETFs, bonds, futures, and PC power.

Is Dow Jones this hard-up for business writers? Lucchetti would be better served writing for a tabloid.

Tomorrow's the Due Date for Citi's 2nd Opinion

2005-11-22T13:52:00.000-05:00

Just a quick reminder, per the settlement between "The DYX" (read: Higgens & Co.) and The NYX, Citigroup has until tomorrow to submit its fairness opinion to the court. See the 2nd to last paragraph in this article for evidence that tomorrow's the day.

It's possible that NYX will release the content of Citi's fairness opinion towards the end of trading tomorrow. Then, Thursday, the markets here in the US pause so we can all be with family, eat a ton, and give thanks to Jerry Putnam and his team for providing AX shareholders with a tremendous year.

And speaking of years, here's a presentation that I posted on ArcaNews (scroll down to November 22, 2004), exactly one year ago, today. It was clear then, as it is today, that ArcaEx is the bourse of the future. This presentation was given to a group at the Weatherhead School of Management at Case Western Reserve University last autumn -- I only hope that some ArcaNews readers, and some that attended my presentation, purchased AX when it was trading in the teens -- and scores of analysts were downgrading them. Those analysts include:
-Charlotte Chamberlain, Jeffries & Co.
-Rich Rupetto, Sandler O'Neil
-Roger Freeman, Lehman Brothers
-Anonymous (source of downgrade put on "analysts at Piper Jaffrey,"), Piper Jaffrey
-Richard Herr, Keefe Bruyette
-Michael Vinciquerra, Raymond James

Look no further than ArcaNews for accountability for these incredibly-wrong analysts (click here, and scroll down to June 17, 2005 for a "knucklehead scorecard") -- and ask yourself, what does it take to be an analyst? It's amazing that anyone gives these clowns time on earnings calls. In fact, last quarter's call included a question from an analyst asking Putnam, et. al., if they could provide metrics that would be meaningful to them (the analysts) so they can figure out how to assess AX. Isn't that an analysts job? You can listen to that call here.

What's Fair About a Fairness Opinion?

2005-11-21T11:16:00.000-05:00

The next event in the NYX story is the delivery of a fresh fairness opinion from Citigroup -- a concession the NYX agreed to last week in order to quell Mr. Higgens and his group of grumpy rebels.

What exactly is a "fairness opinion?" When and why are fairness opinions issued? The answer to these questions are contained in this insightful article from Bloomberg.

Lazard provided the official fairness opinion in the NYX deal announced on 4/20/2005. In their assessment, they viewed the proposed 70/30 equity split of the NYX as fair. And they will be paid for their time and opinion, most likely, once the deal closes. The hitch here is, the deal closing.

This assumption is based on the fact that ~90% of the time, a bank's fees for their fairness opinion is delivered once the deal closes. (click here for source).

Citigroup has been mutually agreed upon by The NYX and "The DYX" (read: The Higgens group) to issue one final fairness opinion. One thing is for certain, this additional, trivial opinion will cost AX and NYSE shareholders a significant amount of money. That's money that comes from the cash that the NYX will have once the new company has been formed.

There are two possible outcomes to the Citigroup opinion:
1) The current deal structure is fair;
2) The current deal structure is not fair, but here's what is. . .

Regardless of which of the aforementioned outcomes become a reality, the Dec. 6, 2005 vote among NYSE seat holders will commence. The first outcome is pretty straight-forward, however the second one is worth exploring.

If Citi comes back and says that the terms of the deal are not fair, they risk damaging their relationship with NYX and would not likely be considered down the road for investment banking needs that are certain to arise from a rapidly growing, global exchange that sells much more than equities. Any future deals that NYX does might not come to Citigroup when there's a sufficient number of other investment banks that could be used. They also risk making Lazard and Goldman Sachs look bad.

What would Citi gain from issuing an opinion that is considerably different than the deal already struck among Wall Street's greatest titans -- NYSE and Goldman Sachs?

For one thing, an opinion that differs materially from the one already issued, could interfere with the growing value of NYSE seats, and AX's rapidly rising stock value. But, perhaps of greater consequence to Citi, is that if their opinion raises enough questions in the minds of those voting on the deal, to the point where a 2/3 vote is not achieved, and the deal doesn't close, then guess what? Citigroup won't be paid.

So right now, Citigroup holds the key to the vault for AX shareholders, NYSE seatholders (soon to be brethren), Goldman Sachs, Lazard, Citigroup shareholders, and Citigroup itself. That's an awful amount of stakeholders that stand to be hurt if they issue an opinion that is considerably different to the one already issued.

So who gains if Citi comes back with a materially different opinion? To be sure, Higgens and Langone would have significant gains to their egos, but beyond that, not many others'll gain (except for those that decided to write calls on AX to go against the deal).

To be sure, this new fairness opinion is a waste of money and time. There is nothing about the new opinion that has to do with closing this deal. Except, that anything dramatically different might effect sentiment of NYX holders, but probably not their vote since they've seen the value of their seats and future stock skyrocket since the deal was announced on 4/20/2005.

The vote will happen on 12/6/2005, and (most likely) there will be an announcement shortly thereafter letting everyone know that the deal closed -- once and for all. Once the deal is closed and NYX is trading in the public market, this trivial excercise of creating inertia for the deal, will finally be put into the proper light.

One share of AX = One share of NYX

The fact of the matter is that once the NYX is traded publicly, the market will decide on fair value for NYX stock. The percentage of equity ownership has absolutely no consequence on the value for a share of NYX. When someone in the public market goes to buy or sell a share of NYX they won't be asked which side of the merger they came from. The price they get for their shares won't depend on anything related to the percentage of equity ownership of the NYX.

The percentage ownership split matters for NYSE seatholders as it values how many of the outstanding shares of NYX are available to give their current seatholders. For AX shareholders, the split is of no consequence (see: ArcaNews story regarding this here).

The NYX deal has been cleared by antitrust authorities. Now all that's left is the vote that will occur in approximately two weeks. The fairness opinion that Citi issues will be the last distraction thrown into the biggest deal in US stock market history.

Lucchetti At It Again; Judge's Insight Questionable

2005-11-15T10:46:00.000-05:00

Looks like Aaron Lucchetti's up to it again. Trying feverishly to create news when there is none. In today's WSJ the often misguided Lucchetti scribes an article with the dubious headline, "NYSE Dissidents Gain Some Support in Court." To be sure, the headline belches a hint of fear into the hearts of NYX bulls (as evidenced by AX's weak open this morning [~$46/share]). Equally certain is the fact that Lucchetti takes comments out of context to apply to his story.

In a capitalistic, demographic society, government typically keeps at least an arm's length from private enterprises. Courts are not investment bankers, and they don't teach concepts like calculating net present, value, terminal rates of growth, or discounted cash flow models in law school. In fact, they don't discuss income statements, balance sheets, and statements of cash flows. They discuss law.

No judge is better suited to value the NYX deal than the ivy-league, mensa-society, hardcore, investment bankers at Lazzard and Goldman Sachs. It's particularly interesting to look at Judge Ramos's track record. This fella has a documented history of misleading people -- see the top of the second page of the aforementioned link. Keep in mind that he has a background in tennant-landlord relations, and the NYX case could be out of his league.

Nonetheless, Lucchetti conjures up an image that Higgens and his handful of malcontents has gained judicial support regarding its claim that the NYX deal should be re-valued, and that the scheduled Dec. 6, 2005 vote among NYSE seat holders should be postponed until the valuation has been re-assessed.

Lucchetti writes, "A state-court judge reviewing the New York Stock Exchange's deal to acquire electronic-trading firm Archipelago Holdings Inc. said he was concerned that 'somebody missed the boat' in assigning a value to the Big Board, lending some support to dissident NYSE members who say they should receive more than 70% of the stock of the combined company."

Let's examine Luchetti's nonsensical statement. Where's the context for the judge's statement? The judge thinks he has a better idea on valuation methods than Goldman Sachs? Goldman is the world leader in investment banking.

Moreover, Lucchetti takes this simple statement and uses it as a framework for the rest of his bearshit (read: bullshit). Lucchetti continues, "In court, Justice Ramos called the sharp run-up in Archipelago's stock price since the deal was announced in April "troubling." With Goldman Sachs banker David Schwimmer on the witness stand, the judge raised questions about whether the deal should have included a "cap" or "collar" to adjust the terms if Archipelago's share price rose more sharply than the value of an NYSE membership."

Which words are Lucchetti's and which are Judge Ramos's? Sharp run-up in Archipelago's stock price is Luchetti's phrase -- not that of Ramos. "Troubling?" What the heck is that supposed to mean? What's troubling about it? The USA is a capitalistic, demographic society which has fostered free enterprise for centuries. Free markets are an essential cornerstone for our society, and a state judge's remarks about a company's stock price are unwarrented unless there's malfeasance involved -- and rest assured, that's not the case with the NYX deal.

Lucchetti continues, ". . .NYSE members can actually benefit from the rise in Archipelago's stock price since they stand to own shares in a new company pegged to the value of Archipelago's stock price." That must've been a painful sentence to write for Mr. Lucchetti as it is counter to his overall sentiment.

IF NYSE MEMBERS BENEFIT FROM A RISING AX STOCK PRICE, THEN
A) WHY IN THE WORLD WOULD MEMBERS BE OPPOSED TO THE DEAL?
B) WHY IN THE WORLD WOULD MEMBERS WANT SOMEONE TO INTERFERE WITH THE FREE MARKET SYSTEM AND THE INCREASED INTRINSIC VALUE OF THEIR SEATS?

Finally, Luchetti indicates that Judge Ramos may not understand how free markets work. Lucchettis says, "Pointing to the sharp rise in the price of shares of the Chicago Mercantile Exchange, which went public in 2002, the judge asked: 'Did that set off any alarm bells?'"

Alarm Bells?

What kind of alarm bell should be sounded as a result of the free market bidding shares of CME to an impressive level? Does the judge believe that all companies in a sector are valued equally? Does the run-up in Google imply that any deal inked in the media space should have a collar? All a stock price reflects is the value that investors believe is fair at any given time. As sure as a day has 24 hours, stock prices reflect this fair value.

What does Judge Ramos think of Berkshire Hathaway's share price? What are his views on the macro-economy? What are his feelings regarding Regulation NMS? Does he even know what Archipelago's revenues were last quarter? Does he feel that AX has a reasonable price/sales ratio? What are Judge Ramos's feelings regarding the EVA of AX? Courthouses are not investment banks. And its not clear if Lucchetti is really a business reporter.

How to Buy Insurance On The NYX Deal

2005-11-15T09:09:00.000-05:00

Savvy investors realize that shelling out a couple hundy to purchase '06 puts with a decent strike (like the jan 35s) is the way to purchase insurance on your ax shares and lock in most of the impressive gains that have already been made.

People buy health insurance for the if-come they'll get sick. Folks buy auto insurance for the potential that they'll wind up in a car accident. Gamblers purchase insurance when the dealer shows an ace to hedge the chance that he lands a blackjack.

Investors purchase puts to lock in gains. If options are foreign to you, consider putting in a stop-loss order.

1st NYX Deal Could Be Biggest In Centuries

2005-11-07T17:12:00.000-05:00

A favorable vote on 12/6/2005, SEC approval, and an official closing/IPO gives way to yet more opportunity. And with ArcaEx as the engine of the trading world's future, the opportunities are truly boundless.

The idea that there may be a fusion between the NYSE and the London Stock Exchange, an idea that ArcaNews has discussed before (see posting below dated, 10/28/2005), has been reported in London's Guardian Observer (read entire article here ).

The Guardian Observer states:

"...it emerged that the New York Stock Exchange under John Thain is also considering a bid for the LSE, which would turn the tables on rival European exchanges that have been mulling bids for London for the past 11 months.

Thain, however, is expected to wait until the new year before making a move as NYSE must still complete its acquisition of Archipelago Holdings, operator of a US electronic equities market. The acquisition, which should be finalised within weeks, will involve the NYSE shedding its mutual status and becoming a quoted company.

NYSE could delay its plans if Macquarie presses the green button, but Thain has lined up a bid for the LSE, whose chief executive is Clara Furse, because he believes that London will remain independent despite intense interest from competitors that include Euronext, which operates exchanges in Paris, Amsterdam and Lisbon. Thain is thought to have sounded out his financial advisers about how his plans for London could be brought to fruition."

It's interesting to look beyond the merger/IPO and start considering the myriad methods for the NYX to reward shareholders. The largest transformation in the global equity markets' history is afoot, and we're not even in the first inning. This is only pre-game batting practice and pepper.

WSJ's Lucchetti = Loose Heady

2005-11-03T16:24:00.000-05:00

ArcaNews has highlighted the absurd reporting by this WSJ reporter, Aaron Lucchetti, before. And for the most part, the WSJ has seemed to quell the diarhea of nonsense from Lucchetti's pen. But, on the day when the date for the much-anticipated vote was announced, he thought it'd be news-worthy to publish a report that Higgens and a "handful of supporters" will file a motion to stop the merger vote.

As usual Lucchetti cites his favorite source, "A person familiar with the case." Hmmm, a person familiar with the case? Maybe the assistant of the lawyer working on it? Most likely, there's no source, but he needs to attribute his bucket-headed thoughts to someone.

Lucchetti pontificates that his source has said that "Mr. Higgins's legal team might ask for a new fairness opinion from an investment bank that would be selected by members."

Think about this for a second.

If Higgens has any supporters, it's clearly the minority. So Lucchetti actually believes that a minority of crabby seatholders will block the vote, pay for another fairness opinion, and then pitch the revised fairness opinion (assuming there'd be any revisions) to the majority of seatholders who are quite happy with the fortunes they've amassed since the deal, in its original form, was announced? And then, ultimately when a vote would be held, and the new fairness opinion circulated, he'd be driving the deal? Higgens and a handful of supporters, driving the biggest deal in the history of the US equity market structure? What about any of this conjecture is news-worthy?

Maybe Lucchetti should consider writing for the National Enquirer -- a rag notorious for fictional sources, and laughable stories!

Sue Everyone!

What if members who are in favor of the deal decide to sue Higgens for blocking the vote? Or what if AX shareholders filed a class-action suit to counter Higgens? Or what if the NYSE sued Higgens? Maybe Higgens'll sue the SEC once the deal closes? When would the suits end? At best, the Higgens lawsuit is a waste of money and time.

Date for Vote set: December 6, 2005

2005-11-03T09:09:00.000-05:00

Finally! To be sure, 12/06/2005 will be a big day for AX/NYSE stakeholders. The headwind on AX shares can be attributed to the uncertainty of the vote -- both the uncertainty of the date for the vote and the uncertainty regarding the outcome of the vote.

Warren Buffet's hero, Benjamin Graham axiom, "In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine," is right on the money with AX. From today until the vote commences on 12/06/2005, the market will cast its votes towards the outcome of the NYX deal. In fact, the Street's been casting its vote since 4/20/2005 when the deal was announced. The perception that Langone and Higgens have votes that are more meaningful than anyone else caused AX to face inertia for the months following the announcement (even though the shares rose, their potential value [read: incredibly high value!] hasn't been reflected yet). However, as the date for the vote has come closer, the voting machine has been tipping in favor of the NYX deal closing.

The next thing to consider in the Street's collective voting booth is what sort of empire the NYSE will run once it's a for-profit company that concerns itself with rewarding shareholders. This is where the voting machine begins to be overshadowed by the weighing machine.

In the end, NYX tips the scales. The paint is starting to dry!

Watching paint dry as deal closes

2005-11-01T16:34:00.000-05:00

Interesting article from 10/24/2005 regarding the promise of the NYX. Notable are some quotes by Mr. Putnam concerning the evolution of a digital exchange. Click here to read it.

There's really not too much to write about as we sit here and watch the paint dry, so lets just take a quick look back at some bone-headed analyst calls:

Anyone heard from Rich Repetto or Charlotte Chamberlain?
Not sure if folks remember this clown, Richard Repetto, from Sandler O'Neill, but since he had the audacity to come out on April 22, 2005 and claim that AX shares should trade at bout $19.27 apiece (click here for proof), ArcaNews has the audacity to remind everyone of what a silly call he made in April.

Charlotte Chamberlain has been mute since April 22, 2005 when she downgraded AX as the stock closed at $29.76/share.

Ladies and gentlemen, AX closed today at $47.80/share!

Refreshing report in Crains Chicago

2005-10-31T09:30:00.000-05:00

Chicago Crains Business reporter, Aaron Elstein, has drafted a great article about the NYX deal picking up steam (click here to read it). Rather than write an absurd article about Mr. Putnam's 100,000 share sale, and pontificate about potential uses for his earnings, Elstein elaborates on the reality that the risk of the vote not coming out in favor of NYX is quite low. He explains that while the crusty old critics (read: Higgens and Langone) may've attracted a handful of friends to join their crusade, the Big Board and Archipelago have continued their march -- and their march has gained tremendous support!

To be sure, silly conjecture about potential pitfalls to this deal have been ubiquitous in the WSJ, the Financial Times, and Barrons (to name a few) essentially since the NYX deal was announced on 4/20/2005. It's truly refreshing to read an article that cites facts, names sources, and presents the story as it really is -- an incredible growth story that has and will reward shareholders.

Litigious exchange members not unique to NYSE

2005-10-28T10:32:00.000-04:00

The demutualization of stock exchanges is not unique to the NYSE. The London Stock Exchange ("LSE") was demutualized in 2000. This demutualization process was similiar to that of the NYSE in that members of the bourse had a vote regarding whether it should be demutualized. Read about that here.

Once again, facts prevail, and it is clear that the arguments regarding ownership percentage allocation were about as useful as a professional wrestling referree.

The Chicago Board of Trade ran into litigious members when it announced its plans to demutualize and become a public company. In this case, the minority member lawsuit ended with a verdict in favor of this minority group members. The suit was brought about because a small group of CBOT members opposed the allocation of ownership percentages once the transformation commenced.

Once again, facts prevail, and it is clear that the arguments regarding ownership percentage allocation were about as useful as a professional wrestling referree (read: not at all useful). Now the CBOT is a public company that has seen its stock value rise from ~$55/share to ~$115/share in the course of about 9 trading days.

Every stakeholder in the CBOT (short sellers aren't stakeholders, they're stakesellers) has to be pleased with management's decision to demutualize and become a public company. It is now clear that the split of ownership is completely irrelevant as the market has set CBOT's value -- not an S4, not members, and not CBOT's management. As always, market forces prevail -- and they will for the NYX deal as well. If you're interested follow the link to read CBOT's S4 filing.

So, the LSE and the CBOT are two examples of exchanges that endured litigious members and ultimately had incredibly successful demutualization outcomes.

NYX vs. Nasdaq in Europe

The London Stock Exchange is an ideal takeover target/merger partner for the NYSE. And given competition with Nasdaq, it makes sense to mention that in 2000, Nasdaq's management considered merging with the LSE. For whatever reason Nasdaq's plans fell through as they attempted to open exchanges in Europe.

In 2003, the Nasdaq tucked its tail between its legs and closed down its ambitious European exchange (the Easdaq located in Belgium). Read about that here.

And in 2002, the Nasdaq folded its Japanese operations, as it admittadly failed tremendously there.

Nasdaq's blunders in Europe effectively take it out of the European-market competition. They didn't make any friends with rival bourses while they were over there, and the fact that UK-based Barclays moved its ETFs over to ArcaEx hints towards amiability of British companies with the NYX.

In Europe, the NYSE has a strong chance to successfully integrate with an exchange like the LSE.

Putnam realizes some income

2005-10-27T14:46:00.000-04:00

Today's article in the NY Post suggests that Gerry Putnam cashed in some chips in order to "to possibly buy the equivalent of a seat on the Big Board, according to filings." This brings up a couple of points:

1) Mr. Putnam realized an incredible profit on the ~100,000 shares he cashed in. He still owns 1.2 million shares of AX that would be an incredible tax burden if he sold. Also, these shares still stand to gain considerable value as the NYX deal closes and 2006 brings about the first changes of NMS.

2) Nowhere is it stated that Mr. Putnam is definitively purchasing an NYSE seat. We all know what a stringent process it is in order to gain approval for an NYSE seat -- by the time Mr. Putnam is approved, he'll be president of a company that doesn't have any seats for sale. If he were to purchase a seat -- well, that's one more vote in favor of the deal and (depending on who he buys it from), potentially one less "no" vote.

And while we tread water until the vote, here are a couple of interesting prose about the world's leading stock exchange:

An article from BusinessWeek from August 4, 1997 dubbed, "The Booming Big Board." This is worth a few chuckles: Click here.

A brief blog-post by a law professor from May 3, 2005 -- discusses the notion that indeed there could be one, unified bourse in the US: Click here

Indeed, it appears as though Wall Street is waking to the notion that buying AX is buying NYX before the glitz hits the fan.

Rest assured, the vote'll happen, the SEC'll bless the deal, and the media will be all over this story. Once that happens, $50/share will seem like a bargain!

2005-10-22T17:14:00.000-04:00

NYX Critics!

Making NYSE with disgruntled members

2005-10-22T16:12:00.000-04:00

Recently I posted a survey on the AX Yahoo Finance message board. The aim of this brief questionarre was to try to understand where the nay-sayers (read: those opposing the NYX under its proposed terms) are coming from.

In particular, this survey was directed at "memberunvaunted," a contributing member of the AX message board community. He claims that the NYSE should try to find or make a better deal, and that Mr. Putnam would take a lessor offer if push came to shove.

Today he wrote, "Your survey is difficult to respond to as I believe it is based on a false assumption. Seats have not risen in value because of AX but rather because of the fact that the NYSE is now committed to offering stock in the public markets."

Why then, did a NYSE seat sell for $2.5 million in 1999 when the NYSE was believed to be going public, and this time, with the AX deal was announced, seats sell for ~20% more than they did when they were committed to offering stock in the public markets?

The answer is obvious: It's because of the growth engine that AX represents.

As for surveys based on a false assumption, the one circulating that the WSJ wrote about is based on the assumption that the terms of the NYX deal are not fair. Now there's a screwed up premise!

Quick Technical Analysis Note

2005-10-13T14:51:00.000-04:00

Interesting to note AX's RSI of late. It's in the 30-35 range, which is considered a bullish range. Here's a quick and simple explanation of RSI.

You can view AX's RSI here. It's in the bottom section of the chart.

Patience is a virtue!

The Market of Tomorrow

2005-10-12T15:48:00.000-04:00

It's interesting to consider what a fully-networked global equity market structure could look like.

To be sure, Sarbanes-Oxley ("SOX") has created a virtual obstacle course for companies interested in listing their shares in a US-based bourse. As they say, when life gives you Sarbanes-Oxley, make Sarbanes-Oxley juice!

Here's what I mean.

Once the NYX deal closes, and the world markets digest what this means for their future, more M&A is destined to take place. Ultimately, the NYX should be a leader in this consolidation and emerge as a multi-national organization. The New York Life Insurance Company has demonstrated that just because you have "New York" in your name, it doesn't mean that you can't have an overseas arm, as well. The New York Stock Exchange Group should not be contained to the US, and exploring international options can help jump-start growth.

If NYSE were public today, would it be considered a growth story? Probably not. How could it be? They get to be a growth story thanks to ArcaEx. The canoe is about to get an engine, and if NYX shareholders are the riders, buckle-up. . .here we grow! Think Langone or Higgins have any ideas for generating the type of growth that NYSE seatholders benefit from due to the AX deal? Doubtful. Ok, enough time spent talking about the crabby infidels. Back to the market of tomorrow.

There are numerous advantages that having an overseas arm can produce for NYX shareholders. Perhaps chief among them is that Sarbanes-Oxley doesn't apply overseas. When a multi-national co-lists on an exhange in the US and one in Europe, the rules of the land where the bourse is located apply.

Theoretically, a US-based company can list their shares on an international exchange and bypass the costly requirements that SOX creates. Where SOX is a barrier to entry for many US-based companies, offering an alternative on an exchange in another nation could be appealing.

Though I am not certain of the letter/spirit of the law in these matters, it is clear that growing overseas will provide a competitive advantage.

Reuters reports today about a study commissioned by the NYSE about co-listed companies and their valuations. The article states, "The findings coincide with a further push by the NYSE to attract foreign listings to the Exchange, with Chief Executive John Thain traveling to India and China in the week beginning October 17 to meet managers of prospective listed companies, regulatory officials and government leaders."

So the opportunity is two-fold. One: get companies located overseas to list on NYX. Two: get companies located in the US to list overseas. The opportunities are boundless, and once the NYX deal closes, it will be a lot of fun to watch as the global equity market structure changes.

NYX is the best positioned company and will be considered the Rolls Royce of bourses throughout the world.

Looking beyond earnings

2005-10-06T17:14:00.000-04:00

Earnings are irrelevant at this point. Management has concentrated on the NYX deal and PCX deal this year.

In baseball, towards the end of the season, most teams are mathematically eliminated from achieving post-season status. Nonetheless, the teams that have been eliminated play out the rest of their schedule.

They still keep score. They still play by all the rules, but the outcomes of the games are essentially meaningless.

AX has already won the division. They're simply going through SEC-mandated motions of reporting. The content of their report is really pretty meaningless.

So, earnings this quarter are a big yawn at best. But, just think, at this time next quarter, the NYX deal will be closing, the vote will've commenced and much of the doubt that is currently priced into AX's stock price will be removed. So, this should be the last boring quarter wind-down.

Earnings this quarter are not nearly as interesting as pro-forma numbers for the NYX. This is where management is concentrating their efforts now. Mr. Putnam and Mr. Thain have already begun working together, and their focus is on closing the deal and expanding their revenue as a single entitity. They're quite busy in Washington (AX opened an office there several months ago during the NMS proceedings). They're busy talking with bourses in other countries. In short, they're busy developing strategy for the bourse of this millenium.
Think about the evolution of bookstores. 20 years ago, there were tens of thousands of bookstores throughout the world. Some specialized in used books, others specialized in particular topics or types of books/periodicals. Then Borders and Barnes-n-Noble were born. Most of the smaller bookstores went out of business as they couldn't compete with the economies of scale that the aforementioned stores have. And then, technology gave birth to Amazon. To be sure, Amazon and Arca have some similiarities. Perhaps chief among them are that technology enabled them to aggressively and quickly capture market and mind share. The big tend to get bigger, and the small get acquired or go away on their own. Suffice it to say, the NYSE is about as big as it gets in exchange-land. Aside from the London Stock Exchange, NYSE is easily the leader in stock exchanges throughout the world.

One more analogy: Mom & Pop grocers that were ubiquitious during the early part of last century have been replaced by "Supermarkets." Starting to see a pattern?

The bourse landscape is not much different than the competitive landscape of the aforementioned examples. Today, the speciality exchanges include ones that concentrate on commodities, some that concentrate on options, some focus on bonds, etc. But

This shift is akin to the shift that is at the very early stages in the world's capital markets. Ultimately, the world doesn't need multiple bourses. As the capital markets become globalized and digital, as settlement changes from T+3 to T+1 or even 0, as efficiencies and economies of scale take hold, NYX is the best positioned company to be the leader in trading.

Here's an interesting article from Bloomberg News regarding how others in the industry are sharing the views expressed here at ArcaNews.

Reading between the headlines

2005-10-04T23:04:00.000-04:00

Even though there hasn't been any real news regarding NYX to speak of lately, today's WSJ article, "Building Portfolios with ETFs," underscores the evolution of the equity markets. It's this evolution that fuels AX. ArcaEx is a massive marketplace in which ETFs are enormously popular.

ArcaEx nearly doubled the number of ETF shares they traded August 2004/August 2005. During July 2005 (exactly 3 months after the NYX deal was announced) Barclays moved 21 of their ETFs from AMEX to ArcaEx.

The WSJ article says:

"More banks and brokerage firms also have added ETFs to their investment lineups, according to James Parsons, a managing director of iShares at Barclays Global Investors, a unit of Barclays PLC and the largest provider of ETFs. These institutions are creating what they call wrap programs, in which advisers manage assets for a fee, either working with a client to pick investments or using an investment model created by the institution.

As an investor, it's typically beneficial to play the market like Gretzy played hockey. That is, if you're looking at where the proverbial puck is headed it's clear that retail investors are moving from traditional mutual funds to ETFs. Wirehouses and banks are now requiring their advisors to obtain Series 66 (or 63 + 65 alternatively) to be able to charge a fee for investment advice.

Wrap accounts are becoming popular and ETFs work incredibly well in these programs. This is where the retail investing puck is headed. Not sure of what the market opportunity is - cheggout the numbers from today's WSJ ETF piece:

"ETF assets stand at $251.5 billion, having increased $100 billion over the past year and a half. While growing strong, ETFs remain small compared with traditional funds, which have $8.5 trillion in assets.""

Numbers this big are hard to ignore!

And, speaking of numbers. There's more good news for NYX reported in today's WSJ. In an article, "Volume reaches monthly record," it's reported that options trading volume reached a monthly record in September, and rose 55% from September 2004.

Guess who's getting into the options market game? AX is already there, and this volume data is good news for ArcaEx. But what's exciting is that the NYSE does not currently do ANY options trades. Once the deal closes and NYSE and AX become NYX, NYSE will take its first step into a growing deriviatives market.

NYX will have endless capacity, and only have marginal incremental costs for expanding their revenue streams by being the marketplace for trading things other than just equities.

Morningstar gets it!

2005-09-30T12:06:00.000-04:00

This morning Morningstar published an article titled, "Year-old IPOs that deserve a second look."

"The merger of electronic stock exchange Archipelago and the 213-year-old nonprofit New York Stock Exchange will create NYSE Group, a modern for-profit market with a narrow moat."

In the wake of so many bucket-headed articles that have been written recently, this article comes as a breath of fresh air. The article provides insight to content published in the research report that Morningstar issued on 9/20/2005. The title of this report is, "We like the New York Stock Exchange and Archipelago deal."

Here's what Morningstar says about the NYX deal:
"Archipelago (Pacific:AX - News)

Risk rating:
Above average

Recent price % above/below our fair value estimate:
-31%

From the Analyst Report:
'Markets have long been good businesses. Since at least medieval times, for-profit marketplaces have offered safety to merchants and buyers, providing theft protection and a court to resolve disputes. The merger of electronic stock exchange Archipelago and the 213-year-old nonprofit New York Stock Exchange will create NYSE Group, a modern for-profit market with a narrow moat.' "

More nonsense from WSJ's Lucchetti

2005-09-30T09:00:00.000-04:00

Today's WSJ has an article written by Aaron Lucchetti titled, "Langone Lobbies Against NYSE Deal." Once again, WSJ editors have approved an article with absolutely no merit and zero news-worthiness. Let me explain.

For starters, Lucchetti writes, "He [Langone] has spoken with individual NYSE members and officials of brokerage firms and the floor-trading firms known as specialists; together these people he spoke to control more than 100 of the NYSE's 1,366 memberships, also known as seats, two of the people said. . ."

Two things in this single paragraph are worth noting:
1) ~100 seatholders are Langone's target market -- As we explained yesterday, there are 1366 seatholders in total. 2/3 of these guys need to bless the NYX deal. That comes to 910 votes. Yesterday, Reuters' writer Scott Malone deemed it worth his time to scribble an article that states that there might be as many as 11 new dissidents joining the anti-NYX revolt. Adding the (conservative number) 300 dissidents that Lucchetti wrote about at the beginning of August (see "WSJ reporter can use ride on short bus" at here at ArcaNews for more on that pathetic piece). We get 411 nay-sayers. This assumes everyone that is spoken to joins Langone's revolt. 1366-411 = 955 seatholders still in favor of the NYX deal. That leaves 7% more seatholders that would need to join the revolt in order to create 1/3 of seatholders voting against the NYX deal. But wait, there's more idiocracy in Lucchetti's diatribe.

2) Look at Lucchetti's source for quantifying the number of people that Langone is barking at. See the last line of the quote from Lucchetti's article above. ". . .control 100 seats, two of THE PEOPLE SAID. . ." Begs the question, what people?

Lucchetti writes, "In the past three weeks, Mr. Langone has held several conference calls and one dinner to help drum up opposition to the Big Board's plan, according to people familiar with the meetings. . ."

People familiar with the meetings? This is the WSJ and all they can do is name nameless sources? The mediator of the conference calls is familiar with these meetings, does that make them a solid source?!

3) Lucchetti writes in the article, "Many NYSE member firms have yet to decide how they will vote on the deal. Most have remained silent, awaiting more details from the exchange. LaBranche's chief executive officer, Michael LaBranche, meanwhile, spoke positively about the deal in the weeks after it was announced. . ."

Two things about #3 above. What about the fact that most members have not spoken with the media about the NYX deal imply that these members are unsure of which way to vote? How does Lucchetti jump to this conclusion?!

Finally, Lucchettis writes that LaBranche has spoken positively about the deal. Thing is, towards the beginning of this article Lucchetti writes, "Among the firms Mr. Langone has spoken with are: LaBranche & Co., a specialist that owns 39 seats; Bank of America Corp. specialist operation and Susquehanna International Group LLP, which owns a smaller NYSE specialist firm called SIG Specialists, people familiar with the matter said. . ."

LaBranche has stated that they're pleased with the deal and its terms, so what difference does it make if Langone talks with them? Also, who at LaBranche did he speak with? Their board? Mr. LaBranche himself? And in true Lucchetti fashion, the nameless sources here are "people familiar with the matter."

Stick with the facts and try to filter out the nonsense that a handful of bidness writers scribe. This deal is amazing, and that's why Goldman brokered it, why the NYSE board approved it, and why Mr. Putnam is being named a president of the new NYSE. It's also why the price of a NYSE seat is hitting all-time highs.

Just hang in there until the deal goes through. Then hold on tight as the NYX launches into the global trading marketplace for things other than just stocks. ETFs, bonds, computing power, futures, options. . .They're all coming to the incredibly efficient, top-of-mind share, electronic mega-bourse we know as the NYSE!

Reuters' Malone to join Luchetti on short bus

2005-09-29T16:18:00.000-04:00

Reuters (current parent of INGP until NDAQ deal closes) writer Scott Malone produced an article today that is more ridiculous rhetoric that so many business writers are scribing as they try to fill the time until the NYX deal closes.

Malone's article has the headline, "More NYSE seatholders join Archipelago deal suit." At first blush this implies that Reuters has unearthed some news-worthy insight into the NYX deal. Conjures up an image of a growing group of disgruntled seatholders that will try to thwart a NYX deal. Then you read the rest of the article and it becomes clear that this is about as news-worthy as an elementary school's recess kickball game score -- who the $@%! cares?!

Malone wastes his readers time by stating that, "Seven new seatholders joined a suit first brought by William Higgins in May, claiming the terms of the deal are unfair to the exchange's 1,366 seatholders. With the addition of the new members, 11 seatholders now oppose the merger. . ."

Once again, lets look at the facts:
2/3 vote is needed for the NYX deal to be approved by the NYSE members. That comes to 910
votes saying "yeah" to enable the deal to go through.

11 seatholders anti-NYX? Maybe Malone figures that 11 seatholders added to the ~200 or ~300 seats held by Mr. Urstadt's group (the real-estate executive who WSJ wrote about at the beginning of August [see below, "WSJ reporter could use ride on short bus"]) makes a difference.

Again, lets run the numbers:
1366 seatholders - 300 (just to be conservative) from Urstadt's gaggle = 1066 seatholders left to vote for the deal to go through. Now lets add Malone's latest discovery to the equation:

1066 - 11 newly disgruntled ner-do-wells = 1055 seatholders voting in favor of the NYX deal.

NYX needs 910 "yes" votes. 1055-910 = 145 more "no's" necessary to toss a hurdle in front of this landmark deal. Another way to look at 145 is that it's 10.6% of the total base of seatholders that would need to vote to thwart a deal that makes them quite wealthy.

Malone, maybe you and Aaron Lucchetti from the WSJ should get together and write a book. Maybe call it, "Dummies for Dummies."

Shareholder equity for NYX shareholders will be uniform

2005-09-06T22:34:00.000-04:00

rather interesting discussion about the impact of the percentage ownership stake has emerged in the Arca bleachers (ie., The Y! Finance message boards). For the sake of continuity and depth of concepts achievable with links, thought it'd be fun to forward the discussion here to ArcaNews. To be sure, reasonable people will disagree, but that's what makes a market. Please feel free to post your comments at the end of this post. Bottom line here is that shareholder refers to NYX shareholders and the equity each NYX share/holder has in NYX is equal.

The premise to this discussion derives from a post here at ArcaNews which states that the percentage ownership stake of NYX is trivial to AX shareholders. The fact is that one share of AX will convert to one share of NYX. This fact is stated in the S-4 filed with the SEC.
Again, here's specifically what the S-4 says:
"In the proposed merger, Archipelago stockholders will be entitled to receive one share of NYSE Group common stock for each of their shares of Archipelago common stock." (Source: 3rd paragraph on page 2 of the S-4).

Before getting into the discussion, here's a primer on some of the concepts alluded to below.

Shareholder Equity: Appears on a firm's balance sheet as a line-item. It is calculated by taking the total assets and subtracting the total liabilities. Click here for a fairly good explanation of Shareholders' Equity and understanding a balance sheet.

Revenue: The money received by a firm as a result of its activities (generally sales activities). This number is found on an income statment. Click here for a fairly good explanation of revenue.

Net Operating Income: Also found on a firm's an income statement. Expressed as a formula, it's:
Revenue - Cost of goods sold - sales discounts - sales returns and allowances - expenses
(it's worth noting AX's net operating income growth over the last few years. Check out how AX has grown this line here!!)

Economic Value Added ("EVA"): Expressed as a formula, it's:
Net Operating Income After Taxes - (Capital x Cost of Capital). Click here to learn about EVA from the folks that coined the concept.

These are the basics. Certainly most around here understand them, but it never hurts to put some information out there.

Now, here's a re-post of the discussion from Y! Finance message boards:

FLASHBOY00:
" A few points I need to make:

With regard to the Charles Gasperino article. THis guy does not understand the economics of the NYSE. I agree with the points you made on your website. But you need to add that the price of making the trade is only a small fraction of the overall cost to the stock trader. By far the bigger "cost" is the bid-ask spread. The smaller exchanges he cites as competitors willing to underprice the NYSE can never do it unless the NYSE raises their prices VERY substantially. Their illiquid markets will never create good price discovery and the bid ask spreads will be so wide you could drive a truck through them - the overall cost to the stock trader is then much higher even with lower trading fees on these smaller exchanges. In a sense, the NYSE is the low-cost provider.

With regard to the 30/70 split or 80/20 split being irrelevent - I disagree. Yes, the AX shareholder will receive one NYSE share for one AX share - but depending on the split, there could be a lot more NYSE shares out there and our share would represent a smaller portion of the company ie, we would own less of the company ...so it does matter - a lot. Think about it, if the split was 99% NYSE vs 1% for AX - wwould this not matter? We could still own one share of NYSE, but it would only represent a small sliver of equity in the new company."

ARCANEWS/AMOTLEYFOOL:
"Thanks for your insight flash. I think we see the fraction of ownership issue differently. Take the hypothetical example of 99%/1% and the issue of how much equity in NYX an AX shareholder will have. When an AX shareholder sells a share of NYX, they will receive in return for the share the entire price of a share of NYX. They won't receive 1% of the value of a share.

Take it to the balance sheet where shareholder equity resides. Once AX becomes NYX they'll use the same balance sheet. The balance sheet will not break out shareholder equity for one-time AX shareholders and shareholder equity for NYSE seat holders. There will be one line for shareholder equity and that value will be uniform across the board for all shareholders of AX.
Think of this way:
One apple pie = NYX
if you cut the pie into 30 pieces or you cut it into 70 pieces, in the end you still have one pie. That pie has all the same ingredients contained in each slide. And the end product of all the ingredients is the entire pie.

if NYSE seats/AX shares = NYX, each piece contains the same ingredients, and each piece tastes like apple pie. The taste is not diluted due to small slices/big slices. All the ingredients are blended.

Same here: each item on the balance sheet, statement of cash flows, and income statement is analagous to each ingredient in an apple pie. That apple pie is NYX, the public company with one uniform share value at any given
moment.

Reasonable people will disagree. Here I think we just agree to disagree. The split isn't going to change. Thain, his board, and filings have essentially branded the fact that it's 70/30 - period, end of discussion. This chatter is just fun fodder while we wait for the deal to materialize and ArcaEx to spring into action.

Thanks again for yer insight!"

FLASHBOY00:
"I totally agree that if the intention is to buy NYSE shares AFTER the merger then it makes no difference what the split turns out to be...but if you are an owner of AX now it could mean a much thinner slice of pie.

Thanks for keeping the site going. Are you really 90 years old? "

HNTRHUNTINGTON:

"I have to disagree with your analogy...

While shareholder equity will be the same for NYSE seat holders and AX shareholders post-merger, shareholder equity for AX shareholders could very well diminish prior to the merger. How ? The NYSE shareholders have not had any shares allocated so far. That means the new company will have to generate new shares of stock for every seatholder on the NYSE.

Let's say you have 300 share of AX. Regardless of the merger you'll still have 300 shares, and 300 votes for proxy. But Mr. Seatholder had 700 created for him as a result of the settlement. Has your influence diminished for proxy-related issues ? Yes, assuming you don't buy more shares ahead of time. Will your price/share diminish ? It has to. If all shares are priced equally, the value of a share has to decrease, assuming a constant market cap value. Adding more shares will lead to a dilution in price.

Going back to your analogy, you said,
"One apple pie = NYX
If you cut the pie into 30 pieces or you cut it into 70 pieces, in the end you still have one pie. That pie has all the same ingredients contained in each slide. And the end product of all the ingredients is the entire pie."

True, but how many apples are you putting into the pie in the first place ? Are you counting, say, only the 30 you're contributing, or have you neglected to recognize that someone else wants to add 70 more to the pie ? It may taste really good as a whole, but your initial contribution has just been minimized.

Values for current AX shareholders can only be justified if trader sentiment believes in the long-term viability and growth of the company, and is also reflected by an increase in the company's market cap. Otherwise, the stock may seem overpriced.

I'll keep an eye on further developments. AX is an interesting story, both in the short and long term.

All this talk about apple pie is making me hungry. I'll have some peach cobbler for dessert tonight. "

ARCANEWS/AMOTLEYFOOL:
"Thanks for your analysis -- like a said, this is a fun excercise.

Guess we too, agree to disagree.

Here's what I mean:
You say,". . .shareholder equity for AX shareholders could very well diminish prior to the merger. . ."

I say that shareholder equity is the same for ALL NYX shareholders. There will be one balance sheet, and the numbers on this financial statement apply to one company. That compant is NYX. There won't be any footnotes stating that only a fraction of the NYX shareholders' equity belongs to people that owned a piece of AX prior to the merger.

It's inconsequential that any shareholder equity diminishes prior to the merger because prior to the merger, there will not be any NYX shares. These shares are AX after some plastic surgery. Certainly there are NYSE seats for sale, but these seats only reflect the implicit value that NYSE merging with AX creates. That's another reason seatholders, as a whole, are happy with this merger. Until the merger is complete (likely Q1 2006), AX will have its own financials. The numbers contained on these statements will not include any synergies or accretion of the NYSE bidness. That stuff happens once the deal is done and AX and NYSE are a one single unit. This unit will be NYX.

Another way of thinking of it (to steer away from desserts) is that you have a 1959 Studebaker Lark. No doubt, a pretty cool car. Thing is the engine's old, rusted, and not up to snuff with engines that are in some of today's cars. So, you put a 2005 Corvette engine in the Studebaker and clean the car up. That old '59 Lark's value intrinsicly improves due to a brand new, efficient and powerful engine. Here the Studebaker is the NYSE and the 'vette is AX (please forgive some of these metaphors!).

If all owners of the '59 Lark were told they they'll get new engines that are compatable with their antique car and would give their old buggies new life, these owners would rejoice and be happy to pay a bit of a premium for the engine. That's cuz the new engine represents new life for their historic wheels.

So, I stand behind my original statement that to AX shareholders the split of ownership is trivial.

Newseek = News Weak

2005-08-31T23:02:00.000-04:00

[Disclaimer: Lately ArcaNews has felt like a watchdog for mis-information. This is not the mission of ArcaNews, but it's only fair to look at things objectively. That said, there are truly some good articles about NYX and the changing US equity marketplace. Most recently, Stocks, Futures, and Options ran this interview with Marshall Carter, the NYSE chairman. Here sources are named, and the content is enlightening. A refreshing departure from the crap that's been printed and blogged about here at ArcaNews recently.]

In May of 2005 Newsweek retracted an idiotic, nameless source article which alleged that the US desecrated the Quran. To be sure, that article and its subsequent retraction is a message of zero-credibility, but lots of glitz for Newsweek. Now these bozos have printed a story with anonymous sources speckled throughout, full of quotes that are conceived by Charles Gasparino to support his non-sophisticated diatribe about the potential (albeit, liklihood) that the NYSE will raise its fees. It's really not worth going into how idiotic the whole Higgens-and-his-pals crap is. That's already been covered here. But it is worth noting how absolutely bone-headed the editors are for letting this story go through. This rant is about the notion asserted by News Weak's Charles Gasparino, that raising prices is a bad thing.

Take the US steel industry for an easy-to-follow example of what happens when innovation fosters efficiency while prices for goods sold increase.

In this analogy, Nucor (NYSE: NUE) implemented a disruptive technology known as the "mini mill." This incredible innovation enabled steel to be produced in an incredibly efficient manner.
This method of steel production created turbulance in the centuries-old steel making process. The historic process called for expensive and expansive plants, complex and expensive union dealings, and layers and layers of costs that loaded the costs of goods sold. NUE created a method to keep the cost of goods sold incredibly low, while maximizing its top line.

Flat-rolled steel (for example) sells for a price that fluctuates. Typically when flat-rolled steel prices go up, the producers benefit from an increase in revenue. When a firm can raise prices they, in turn, increase their revenues. The economic value added ("EVA" as its called) is impacted by the top-line (i.e., revenue). When the firm benefits, so do their shareholders. Just look at how NUE's done since 1985: http://tinyurl.com/be9l3.

To determine net operating profit ("NOP"), revenue is a key variable. So, when revenue is maximized, NOP is maximized. When NOP is maximized EVA is maximized. When EVA is maximized, shareholder value is maximized. Briggs & Stratton is another illustration how concentrating on EVA has rewarded shareholders. Look at their chart here: http://tinyurl.com/d4r77.

Getting back to pricing: Most of the time, when prices go up, the firms (and their stakeholders) that collect the higher prices make out. Especially when their cost of goods sold ("COGS") is flat or decreasing. The key here is employing solid management that understands price equilibrium, contribution margins, and how to set pricing at a level that's acceptable to customers. Setting prices is a relatively complicated process where sound management is essential.

So, bringing it back to the NYSE and the potential price increases. As an NYX shareholder it's good news, not bad news, that prices may go up. To be sure, economies of scale are being leveraged and COGS are indeed remaining flat or decreasing. This translates to higher EVA, and generally speaking, a more profitable firm.

Now back to this silly article from News Weak. Charles Gasparino speculates that raising prices is a bad thing. He fabricates quotes and offs them on nameless officials. In addition to a lesson in irresponsibl reporting, Gasparino could use a lesson in price equilibrium, and basic supply and demand elements. (For example, National Public Radio, a highly-respected news outlet, prides itself on only using named sources for stories).

The NYSE will not raise prices past a point of equilibrium. They employ many smart economists that understand this balancing act, and again, as an NYX shareholder, there is re-assurance that management will increase EVA, and subsequently shareholder value and raising prices is a step in that direction. The proverbial "glass half full" scenario has ArcaNews and News Weak looking at the same glass. To create drama, News Weak looks at the glass as half-empty.

In reality, reasonable price increases is part of business. In fact, its an essential part of business. As NYX becomes a public and for-profit enterprise they owe it to their stakeholders to maximize value. Price increases (not just for listing fees, but for data feeds, etc,) will happen, but it's hardly worth an article in News Weak.

To be sure, this story in News Weak won't necessitate a retraction and scores of people won't be hurt like the Quran story managed to do, but come on, write something worthwhile.

70/30, 80/20, 90/10, 100/0 -- Split of ownership doesn't matter

2005-08-18T21:20:00.000-04:00

All the conjecture about what the proper split should be regarding ownership in NYX is laughable. Plenty of folks on Y! message boards and countless articles have addressed this issue. The bottom line is: When you look at the facts (specifically the S4 filed with the SEC recently) there isn't a thing about the split of ownership that matters to AX shareholders.

Here's what it says:
"In the proposed merger, Archipelago stockholders will be entitled to receive one share of NYSE Group common stock for each of their shares of Archipelago common stock." (Source: 3rd paragraph on page 2 of the S-4).

For AX shareholders the split has absolutely no impact on the transition of AX shares to NYX shares. It's not like AX holders are looking at getting 30% of an NYX share -- 1 AX share = 1 NYX share -- no matter what the split is.

To be sure, the split matters to folks that own seats and are looking at getting their stakes purchased before NYX is a public company. For AX shareholders there is no consequence to how the deal shakes out. But for the record, Thain and the majority of seatholders are fine with the 70/30 split. Of course it raises eyebrows since AX is a newish company and the NYSE has been around for two centuries, but beyond a brow raise, and some absolutely idiotic posts in the AX bleachers (read: Y! message boards), the details matter not.

Gotta believe that the smart money has been buying on the recent dips (which most likely are attributable to stock which could be sold for the first time since it IPO'd last year at around 11 bucks). Interestingly enough, over the past few days the last trades have happened at around 8:04 PM EST which indicates west coast trades -- like folks connected to the Pacific Exchange, perhaps.

The nay-sayers have to exist -- that's what makes a market. The key is keeping your eye on the ball, and keeping the crap about the split and its ramifications in perspective. There's no question that it's been a long strange trip since last August. . . But (I think I speak for folks that have been [and are] long AX) at least we're enjoyin' the ride! Again, for AX shareholders, the degree to which the ownership splits doesn't matter whatsoever. That's a fact that is supported in the S4!

WSJ reporter could use ride on the short bus!

2005-08-11T00:34:00.000-04:00

The Wall St. Journal's reporting is losing its
reputation for quality articles as evidenced by the
knucklehead "story" written by Aaron Lucchetti today.

This guy actually was allowed to publish an article
with absolutely no substance. Let me expound.

Lets start with facts.
2/3 vote is needed for the NYX deal
to be approved by the NYSE members. That comes to 910
votes saying "yeah" to enable the deal to go through.

Luchetti writes, "Mr. Urstadt, a real-estate executive
who bought his seat in 2004, will cast only one vote
of 1,366. But his group, a loose confederation of
investors and retired traders, includes about 200 or
300 NYSE members."

First, the difference between 200 and 300 seats is
significant. That's a 33% differential. Pretty
sloppy reporting, if you ask me. Why he can't he
print the factual number is beyond me, and how editors
approve this crappy journalism is even more baffling.

Lets just say that this turkey, Urstadt, has constituents that own 300
seats: 1366-300 = 1066. . .those votes are hardly
enough to counter the seat holders who are giddy
from the increased intrinsic value of their (NYSE
seat) investments.

Next, what in the world is news worthy about, "Thomas
Caldwell, the chairman of the members' association who
controls more than 20 seats, said yesterday he'd like
NYSE seatholders to own more than 70% of the company,
but doesn't feel as strongly about it as Mr. Urstadt."

20/1366 doesn't amount to anything.

This article is pathetic at best and underscores the problems
the WSJ is having with keeping their reputation where
it once was (in the old days of printed news).

NYSE seat fetches $3mm today; Sets all-time record!

2005-08-03T18:58:00.000-04:00

Today a NYSE seat was sold for a record $3mm -- breaking a six-year record, and marking an 85% increase in seat value since the deal of the century was announced on 4/20/2005.

Given this all-time record value of a NYSE seat, thought it'd be fun to reflect on some of the follies that have gone down since that magical day in April. Let's start with Ken "longone" Langone.

This grouchy curmudgeon has been pretty quiet lately. To be sure, his protest impacted AX in the short-run, but sure enough, the weighing machine has prevailed in the long run as today's sale and Arca's share price reflects. Each day that Q1 2006 nears, it is becoming clearer that this deal will not only go through, but be awesome for NYX seat/shareholders.

Next up, Charlotte Chamberlain from Jeffries. Look through the archives here at ArcaNews to gain some insight to her pathetic trading calls. You may recall, on 4/22/2005 she pontificated about why Arca would underperform. AX closed at $29 and change that day. Even better was her call on 11/11/20o04. On that day, while Putnam and his team were creating methods to enhance shareholder value, she downgraded the stock. AX closed at $18 that day. Why Jeffries wants to damage their credibility by letting Chamberlain publish anything related to electronic financial services is beyond me.

And who can forget Sandler O'Neil's Rich Reppetto. On 4/22/2005 he downgraded AX to an unusual "sell." O'Neil's customers who took his advice and shorted the stock are probably still licking their wounds. The stock closed at $29 and change that day.

Then there's Fane Lozman's ridiculous law suit. Lozman was a business partner of Jerry Putnam's back in 1995. Things didn't work out and Mr. Putnam went his own way - and has done fairly well. Lozman is yet another example of sour grapes becoming litigious.

Speaking of being litigious, William Higgins has been pretty quiet lately, too. His beef with NYX is that the deal is not fair for NYSE seat holders. Today's deal should pretty much quail this ridiculous notion. If the deal were not good for seat holders, then why does the value of their seats hit an all-time record today? And why is the value today 85% higher than it was prior to the merger announcement?

There will always be nay-sayers, but that's what makes markets. Thing is these boneheaded perspectives are not only way off the mark, but there's enough history and facts now to really damage the aforementioned folks' credibility.

The Financial Times and other rags like the WSJ have certainly tried to cast a shadow of doubt that this deal will go through. They've published articles stating that the SEC is looking at the merger closely. Surprise, surprise! The deal only represents the future structure of the US equity markets.

If analysts (and their sponsors/employers) could be downgraded, it seems that Chamberlain/Jeffries and Repetto/Sandler O'Neil are "Strong Sells." Thing is a downgrade implies a once bullish (or neutral) stance. Not sure any of the folks cited in this posting have ever had value -- save for being incredible contrarian indicators.

As I've said before. A 7-year old can be as right as the folks that are part of this rant. When you are wrong you are wrong. And today's record NYSE seat sale is a good reminder of just how wrong these clowns were!

Arca in the Big Leagues!

2005-08-01T20:26:00.000-04:00

In the spirit of summer and the great American pastime, thought it'd be fun to compare the AX/NYSE merger with the American League/National League merger at the turn of the last century.

In this analogy The American League represents Archipelago Holdings. So to understand where I'm coming from it helps to look quickly at the evolution of the American League and subsequently of Major League Baseball:

The American League developed from a minor league, the Western League, that aspired to major league status, was formed on January 29, 1900, expanded in 1900-1901 into major cities, and changed its name.

The Western League of Professional Baseball Clubs was a minor league baseball league founded in 1893, and focused in the Midwest. In 1900, league president Ban Johnson converted it into the American League and it achieved major league status in 1901.

To be sure, ArcaEx was a minor league venue during its first couple of years as a regulated stock exchange (and the first fully-electronic, regulated, stock exchange in the US). Jerry Putnam, AX's CEO is like Ban Johnson, the "Western League's" leader. Following this comparison, In 2005, Arca CEO Jerry Putnam and NYSE CEO John Thain converted AX to the NYX.

The NYX and NASDAQ make up the US equity markets the same way the American League and the National League make up Major League Baseball. The American League is considered the more progressive of the two leagues as the Designated Hitter instead of Pitcher batting shows.

The NYX will certainly be considered progressive as they shape the future of the US capital markets, and most likely the future of bourses throughout the digitally connected world economy.

Barclays' move of 20 iShares from AMEX to NYX is like Gallapagos turtles evolutionary migration. In the US capital markets, the migration pattern of the companies that live in this environment (read: are traded here) is towards deep pools of liquidity.

But don't take my word for it. Here's what Lee Kranefuss, CEO of BGI's Intermediary Business says about this migration, "As a leader and innovator in the ETF marketplace, we're pleased to partner with ArcaEx, a leader and innovator in the securities market. ArcaEx's strict price-time priority order matching levels the playing field for all participants and has made it the market of choice for investors in many of the iShares products."

And finally, Dow Jones wrote this today -- a great article that goes deeper into the notion of companies wanting to be listed where there's liquidity.

The Deal with the Deal

2005-08-01T19:40:00.000-04:00

The S-4 that Arca/NYSE ("NYX") sent to the SEC on 7-21-2005 is extensive so here are some highlights from the filing. Hopefully this'll answer questions regarding AX-to-NYX shares, post-merger. This deal has all the makings to be the most significant merger ever to happen in the US capital markets.

Hope this helps:

How many NYX shares will be registered

158,306,662 shares.
Paraphrased from the S-4:
The number of shares of common stock, par value $0.01 per share, of the registrant (“NYSE Group Common Stock”) being registered is based upon the sum of (i) the product obtained by multiplying (x) 48,815,000 shares of common stock, par value $0.01 per share, of Archipelago Common Stock estimated that will be outstanding, on a fully diluted basis, immediately prior to the mergers by (y) an exchange ratio of 1.0, plus (ii) the product obtained by multiplying (a) 1,366 memberships in the New York Stock Exchange, Inc. outstanding immediately prior to the mergers, by (b) an exchange ratio of 80,154.95, which is a maximum estimated exchange ratio assuming that there are only 46,925,000 shares of Archipelago Common Stock on a diluted basis for purposes of calculating the exchange ratio."

Without the legal mumbo-jumbo, the formula for determining the number of NYX Common Shares there'll be looks like this:
48,815,000 x 1 + (1,366 x 80,154.95) = 158,306,662 NYX Shares.

What is the $39.595 'Proposed Maximum Offering Price' I've heard about?

The proposed offering price is $39.595 and is used solely for the purpose of calculating the registration fee, the proposed maximum aggregate offering price per unit is $39.595, which is the average of the high and low prices of AX on 7-19-2005.

They had to come up with a figure to use in order to determine the registration fee. A common misunderstanding is that this will be the price of NYX when it goes public.

How many shares of NYX will my AX shares convert to?

Since this is such a common question lets just quote the S-4. Here's exactly what it says, "In the proposed mergers, Archipelago stockholders will be entitled to receive one share of NYSE Group common stock for each of their shares of Archipelago common stock." (Source: 3rd paragraph on page 2 of the S-4).

The Press and Accountability -

2005-07-19T10:41:00.000-04:00

ArcaNews has published plenty of posts regarding analysts that put out reports that strongly state their negative outlook for AX (i.e., Charlotte Chamberlain and Rich Repetto) only to be proven totally inaccurate after several days, weeks and/or months.

Now it's time to hold rags like the Financial Times and Barrons -- two name-brand publications that often mislead investors, but insulate themselves through the name of their paper.

During January 2005, the Financial Times published a report that stated that Archipelago was the front-runner to acquire Instinet. History certainly proved FT wrong here -- dramatically wrong. In fact, a 7-yr. old could make a claim that GE is the front-runner to acquire Disney, and they'd be just as accurate as the FT -- when you're wrong, your're wrong.

Next, lets look at Barrons. To be sure they publication is loaded with financial data, but it's when they start to postulate that they run into problems. A gander back to the July 24, 2005's Barrons illustrates their bone-headedness as they pronounced MSFT a growth stock. This was actually their cover story -- complete with snazzy graphics, analysts quips, and all! MSFT closed at $28.66 on the Monday following this cover story. Today they are trading at ~$25.96 (note: MSFT did have a $3/share dividend bringing their price to $25.66 ex-dividend. A whopping gain of $0.30 cents -- not even enough to buy a copy of Barrons!

I encourage you to read through the historical posts on ArcaNews to learn how the same names continue to make the same mistakes. Henry Blodget had the misfortune of covering stocks that were front-and-center during the late 90's -- his inaccuracies have banished him from the Street and made his name synonomous with analysts that couldn't get it right.

Repetto and Chamberlain don't make CNBC and due to their coverage universe are not household names. Nonetheless, for folks interesting in accurate information, it's a good idea to ignore the cover of Sports Illustrated, and not take what's in the Financial Times, the Wall St. Journal/Barrons, or analysts research reports seriously.

Pennies from Heaven!

2005-07-15T16:24:00.000-04:00

Interesting article about Arca's plan to start trading options in penny increments. In addition to the trailblazers at Arca re-writing the book on options trading, their delta is disrupting the actual infrastructure of options markets. A disruption that better serves investors by reducing price increments from .05/.10 to .01.

This happened to the equity markets at the turn of the century and caused so much trouble for the likes of companies like Nasdaq. The problem is that systems that exist to trade at nickel intervals need to be re-created to support penny increments. With equities, the move was from fractions to decimals (which reduced price points tremendously). Systems had issues with a surge in data, rounding, and supporting new price points. So much trouble, in fact, that the NASD kept urging the SEC to postpone the date that decimilization would be official. Eventually, the exchanges invested in their infrastructure and were able to play by the new rules.

This is what is finally happening to markets that trade deriviatives (i.e., options). For disgruntled (read: idiotic) NYSE seat-holders that argue that the NYSE doesn't need Arca -- or atleast don't feel that Arca is worthy of the current terms of the merger -- this should help illuminate some of the value that Arca provides the 200+ year old burse. How much money and how long would it take for NYSE to get into deriviative trading? Once in the deriviative space, NYSE would have to invest heavily in creating systems that support penny pricing. With Arca, they get that ability instantly.

On another note, the recent news regarding some seat holders taking NYSE to court is absurd. The clown that's suing Thain for not telling him that the NYSE was going to be a for-profit enterprise in February and the joker that's demanding access to documents from the Arca/NYSE deal have no regard for Regulation FD.

Late last year I was doing some independent market research and had a dialogue with Mr. Putnam and some executives from his team. I can tell you that Mr. Putnam praised me for this resource, but was also very mum on any plans Arca had merging with other exchanges. He cited Reg FD and apologized for not being able to discuss such things.

When I asked execs at Arca why Goldman Sachs was not listed (or even co-listed) on ArcaEx, I was assured that Arca was aggressively pursuing all opportunities. Again, citing Regulation FD as why I couldn't get any more color related to these issues. For an equity research fanatic like myself, reading between the lines indicated that there had to be a good (read: profitable) reason for keeping a tight lip. It also demonstrated management's respect for rules and regulations.

These litigious whiners have sour grapes and they're quite transparent. For long-term investors, though, these complainers have given folks a bit of a buying opportunity on weakness.

Y! Message Boards: Flashboy00's Thesis Reprint

2005-07-04T01:02:00.000-04:00

Many thanks to Flashboy00 over at Y! Finanace for posting his thesis regarding the NYSE Group. It is outstanding! Jam-packed with a ton of info. The post is a bit difficult to navigate since it's divided into seperate posts. For everyone's convenience I thought I'd repost it in its entirety here. So here it is!

Author: Flashboy00

The following is a copy-n-paste of the original message:

Thesis

NYSE Group

(or why I am buying the global financial tollbooth)

What is an exchange?

Mulherin et al (1991) stress the definition of a financial exchange not as a market, as usually is done, but as a firm that creates a market in financial instruments and thus has the property of the price information produced. Furthermore, a security market can then be seen as a firm that produces a composite good, the exchanging of securities, which may be formed of different elements (Padoa-Schioppa, 1997): price formation, counterpart research, insurance for a good clearing, and the standardization of the good exchanged. The “production cycle” of these businesses is divided into three parts: listing, trading, and settlement. These three different stages of the
production cycle lead to the formation of different goods that the exchange can sell: listing services, trading services, settlement services, and price-information services. Many exchanges have dropped the settlement service as has the NYSE.

Exchanges: toll roads on capital markets volumes
Buffett has remarked that the best investment in the world is a toll booth. Dominant exchanges follow this toll booth model. In general, whenever an equity is bought and sold a fee is paid to the exchange. When a new company “enters” the public company world it must pay a fee to the toll booth. Also, every year that company remains public, the tool booth collects a fee. Because of the toll booths strategic location it is also an invaluable source of market information which it sells as well.
Exchanges are geared investments on capital market volumes. That said, they are less geared to market value than brokers since trading earnings are in part driven by the number of trades rather than purely their value - much like a toll road. So while this is a cyclical industry to some extent, i.e. there are less IPO’s during a bear market; the revenues of an exchange do not follow the slope of the Dow Jones or any other average. The recent bear market in Europe is demonstrates this well. Take the UK in 2002, which was the most extreme: while the FTSE fell ~25%, the value of trading only fell 4% and the number of trades grew 16%. LSE equity trading revenues were up 8%. It seems that new trading strategies are slicing and dicing orders and generating more trades and this has resulted in ever higher volumes.

Where does traditional exchange revenue come from?

Generally revenue comes from three major sources plus two eventual or

minor sources:

Taking an example from European exchanges these sources are listed below along with the percentage of revenue contributed by source.
(1) trading fees -both membership fees and trading fees (28%)

(2) listing fees -both initial and yearly listing fees (32%);
Listings are a very lucrative source of revenues for those exchanges that serve as a market of original listing. Companies pay significant fees to have their securities listed on the most important and prestigious exchanges. However, several issues cloud the revenue potential for listings. First, an exchange must be a preeminent exchange to charge for listings. Second, this source of revenue is geared toward market conditions. The recent bad market in 2001 has shown that IPO’s certainly drop off and companies withdraw from secondary listings(i.e., on other than their home market) listings when volumes decline

(3) information and price-dissemination fees (17%)
Market data has been a great source of revenues for exchanges and has been resistant to downward price pressures that have caused many market data vendors to become less profitable. Pricing pressure on exchanges has had little impact because of both the lack of competitive sources for the information exchanges provide and, in some cases, of data collection and distribution consortia (e.g., the Consolidated Tape System and Consolidated Quote Systems for US equities and the Options Price Reporting Authority for US options) that protect the member exchanges from price competition. Nevertheless, two trends could end the price stability enjoyed by exchanges. First, prices and quotes are less important to traders and investors than they once were. Those exchanges that provide electronic trading systems provide market information that is 'actionable' (i.e., the quotes can be hit by the viewer) as part of the trading system. This diminishes the value of quotes distributed through traditional vendors. Second, traders and dealers are able to 'shop' their executions among markets for reporting purposes. Recently the Island ECN in the United States began printing its trades in NASDAQ listed issues on the Cincinnati Stock Exchange instead of through NASDAQ. These factors may mean that revenue from data may not be as lucrative in the future. The data that comes out of a major hub like the NYSE may however retain its importance in the market.
The other sources of revenue are:

(3) settlement fees (16%)
Exchanges are transferring this activity to specialized entities where exchanges have been, among the shareholders.

(4) other revenues may come from the developing and selling of proprietary software and information technology (20%).
Where does traditional exchange expense come from:

Not all the costs contribute directly to the production of the three main “goods" sold. There are the costs for the regulation and supervision of the market that make it more efficient, and thus more attractive, for issuers and intermediaries to enter. Many exchanges have created arms length corporations (as the NYSE is proposing) to handle these serves, although the costs come out of exchange revenues. Regulation of the markets is critical for the reputation of exchanges, to facilitate daily trading and to persuade would-be traders and investors to use the exchange. However, it is difficult to find any effective method to pay for these services even though they represent a significant portion of the costs of an exchange. Therefore one of an exchange's largest costs must be paid for out of other revenues.

There are R&D costs and marketing costs, and there could be an implicit cost in charging low or zero fees to traders and issuers.

Who are the customers?

The customers of exchanges can be divided into direct and indirect customers:

Direct customers are the direct purchasers of exchanges' services. The most important are issuers (the companies on the exchange) who usually pay fees in order to be listed on an exchange; intermediaries who usually pay fees in order to be admitted to trading; and information vendors who pay fees to have the right to disseminate price information of the market (Reuters would be an example)

Indirect customers are all the entities that send orders to intermediaries to
be executed on an exchange. These include institutional investors and all other financial intermediaries.

Why they trade on the exchange

The choice to trade on any particular exchange involves several factors. A major factor is the overall “quality" of the exchange; price factors could be important as
it is possible that part or all the cost of transaction paid by the intermediary
is passed along to the customer. Also, market microstructure, either as liquidity, price discovery, or quick execution of the orders, is different on different exchanges (i.e. order or quote-driven markets.) Finally, market reputation and regulation can influence the choice.

The changing environment

For those who have been following the European exchanges over the last few years it was clear that there have been benefits for the owners to the exchanges becoming public

entities. These have seen some great market cap growth. Along with going public, exchanges have started to compete with each other for business. In an increasingly globalized environment the traditional barriers that would keep other exchanges away from companies from other countries have fallen. Exchanges were once seen as geographic entities. This idea of exchanges is less and less valid. What they are evolving into is industry specific entities. As an example, the TSX has the greatest collection of mining companies than any other exchange from multiple countries. There are advantages for companies to be listed where their peers are listed as this is where the market is for these companies. Hence an exchange from a country half way around the globe can become a major competitor for listing “native” companies of an exchange in a different country.

It is in this environment that the NYSE had found itself. Staying private and “non-profit” would have lead to reduced market share and eventually to niche markets developing on foreign exchanges (like the TSX mining example) which would have attracted companies away from the NYSE. To industry observers it should have been obvious that they would seek to compete on a level playing field and go public.

The merger

How they went public took me by surprise. The traditional exchange has gone through a process of demutualization and then going public. This can take several years. For several reasons, the NYSE did not have this time. They used a clever and savvy deal that in one shot got them one of the best electronic platforms in the industry, a 25 percent share of NASDAQ trading, plus they get to demutualize and go public, and eliminate a competitor. The deal positions the NYSE to not only retain the 25 percent share of NASDAQ trading, but also positions it to get into options and take a bigger share of ETF (exchanged-traded fund) transactions – both of which represented significant aspect of the archipelago business. This all occurred on the eve of the passage of Reg NMS and the extension of the trade-through rule to all U.S. equity markets. Not a coincidence I think. (more on RegNMS later)

Competitive Advantage

A survey by the Swiss Stock Exchange found that there are no economies of scale for the
listing and non-trading services of stock exchanges. The study showed that being
bigger does not produce any material benefits in these areas. The trading function however, generates significant benefits in scale as the market for an asset or security develops added liquidity and depth as counterparties present themselves in greater volume. Liquidity itself breeds some powerful benefits, such as the ability to trade in the size, at a time, and as near to a desired price as possible. It also generates a “virtuous circle” of attracting more traders and products, which creates more liquidity, which attracts more traders and products—and so on. Due to the network nature of business, volume tends to consolidate in one marketplace, in both space and time.

How does the NYSE perform on liquidity? Currently, 90% of orders of 10,000 shares or more go through the NYSE, which suggests that it is a deeper market than any of its rivals. This also explains the paradoxical conclusion contained in a study of 100 large institutional traders conducted by Plexus, a research firm. This study found that, despite much bigger commissions on the NYSE than on NASDAQ, the total cost of a trade (ie, combining commissions with price deterioration) is on average one-third lower. This attests to the powerful competitive advantage of high liquidity. A competitor can try to start a price war by cutting trading costs – but even with much higher trading costs a dominant exchange will still have less overall costs of trading because the biggest cost to any investor is the bid-ask spread.

There will be a strong moat around the NYSEs trading functions based on the natural
Monopoly of liquidity. But what about the listing service. The listing services will benefit from a different type of moat. That being the cache value and brand of the NYSE itself. Most companies would rather have an NYSE listing as it legitimizes their enterprise.

SEC approval is necessary to start a new exchange and this will effectively keep most potential competitors from setting up shop. This represents another barrier to entry and widens the moat further.

Operational leverage

The other aspect of what makes this a great business is that the costs of running an exchange are basically fixed – with increasing revenues not requiring significant increase in capex. Revenue growth tends to fall to the bottom line with even small amounts of revenue growth leading to relatively larger increases in net income. As this is occurring the switch to a cheaper electronic platform also will be occurring (which will continue to lower costs and increase margins) and as such net income should grow at a much faster rate than revenue. This basic theme can be seen most vividly in the revenue and net income growth of the cme. CME's first-quarter revenue grew 32% from the previous year to $224 million. And profit was up disproportionately at 51%.

To demonstrate this for yourself you can build a spreadsheet and let revenue grow by 4% per year only. If you set the net margins at 20% (similar to some exchanges) then earnings will grow long term at 11%. Small changes in revenue lead to large changes in earnings when costs are fixed.

Regulatory Changes

As Alan Greenspan has recently stated, exchanges tend towards natural monopolies because of the liquidity issues noted above. Because of this fact, there is likely always to be some element of regulation in this industry. For American exchanges, regulation comes from the Securities and Exchange Commission. In fact, it was a recent SEC rulechange that acted as the catalyst for the merger of NYSE with AX and the overnight transformation of the NYSE into an electronic exchange. This rule change is known as Reg NMS (The trade through rule is the most significant rule change of reg NMS). And in fact, some believe that the whole reason for Reg NMS was to pressure the NYSE — which handles about 80% of listed stock trading every day — into moving more rapidly to increase automation and lower costs to investors.

The trade through rule basically states that a trade must go through the exchange with the best price. It is illegal for a broker to put a trade through on exchange A if exchange B is posting a lower price for the shares.

Now it is important to understand that the trade through rule has been in existence for many years and the recent ruling did not abolish the trade through rule. The recent regNMS change was to (1) extend the trade through rule to ALL markets including NASDAQ (NASDAQ is not officially an exchange and has not been subject to the trade through rule in the past) and (2) insist that these trades occur within one second and not the 30 seconds that the NYSE was taking to process these trades on the old floor. Crucially, it also proposed giving customers the right to waive the rule. Regulation NMS, will become fully effective in 2006 with the 'best price' component fully effective on June 12, 2006.
The trade through rule was instituted decades ago to protect regional exchanges from the NYSE. Ironically, it ended up protecting the NYSE from electronic upstarts. Under the rule, the NYSE would get a trading order if it has posted a better price. It then had 30 seconds to confirm or reject the transaction. In financial markets, 30 seconds is a lifetime. By that time the price has often moved and the potential ECN customer is gone. This also ignores the “depth of book” i.e. if there are only a few shares available but it represents the best price then the NYSE gets to see the transaction. But because the NYSE was so large it likely also had a lot more shares available at any given price.
The rule allowed the NYSE to see almost every transaction and retain those that it wanted. That, in turn, gave the exchange extraordinary volumes, which in turn allowed it to provide better prices. In a sense this is an extension of liquidity begetting more liquidity and the trade through rule has functioned as another competitive advantage for the NYSE.
In essence, with Reg NMS, the competitive advantage represented by the trade through rule provision remains intact; it just needs to move a lot faster than 30 seconds. Hence, the rule will eventually give priority in filling stock orders to exchanges that provide automatic execution -- defined as the ability to process an order in a second or less.

To put things in perspective, the SEC's Office of Economic Analysis found that only approximately 2% of all trades on NASDAQ and the New York Stock Exchange were trade-through in nature.

Some see the new regulation as a set back for the NYSE. This is wrong. It could have been so much worse. The nyse nightmare scenario would have been if Reg NMS adopted a reform that would mandate depth of book (DOB) order routing, a practice that could gravely weaken the New York Stock exchanges advantage in listed business.
That’s because mandatory DOB routing eliminates intermarket competition
by giving any limit order, regardless of where it was placed, the same protection.
This would effectively transform all exchanges into a large virtual electronic Consolidated Limit Order Book, or CLOB. Under this system all exchanges become a piece of a larger electronic network turning a capitalistic company into a commune. This fortunately did not occur.
The nightmare scenario for the NASDAQ was that the trade through rule got extended to include the NASDAQ and it did! Now the nyse can use their larger market in certain cross traded stocks to steal business from the NASDAQ. The rule as it came down was neutral to the NYSE (as long as it merges with AX) but is bad news for the NASDAQ which now must face the possibility of orders getting routed to the NYSE which did not occur before as it was not under the regulation of the trade through rule.

Consolidation

In most major industrial cities where businesses were starting up, requiring investment capital to grow and thrive, stock exchanges acted as the interface between suppliers and consumers of capital. In the UK and US stock exchanges were found in most major centers. This has changed. In Canada, the smaller exchanges have merged into the TSX leaving only Montreal as a derivatives exchange. The trend toward exchange consolidation is most active in Europe such as the unification of the U.K. stock exchanges in 1973 and, more recently, the three major Swiss exchanges in Basle, Geneva, and Zurich. The single European currency is eliminating barriers to moving capital and assets across country borders and removing both interest differential and currency variance. These trends will focus liquidity into one market space to the exclusion of local interests.

The merger between NASDAQ and the American Stock Exchange was a
recent major-scale move in this direction. Very recently another wave of consolidation has occurred and this involves the elimination of ECN competition. With Archipelago going to NYSE and Instenet going to NASDAQ, Bloomberg LP's TradeBook is one of the last free-standing communications networks. After the two deals are completed, the NYSE and NASDAQ will emerge as the two main cash equity trading centers in the United States, each competing for the other's order flow. It will leave one remaining electronic communications network (TradeBook); a handful of small, regional stock exchanges; and the American Stock Exchange, which trades mainly options and exchange-traded funds. The trend is toward creating a duopoly in the US for stock trading.

As a general rule one is much better off investing in an industry where competition is shrinking than one where it is expanding. This will only make the NYSE an even better investment.

Duopoly (the NASDAQ)

The NASDAQ will be the main competition for the NYSE. The model used by the NYSE and NASDAQ are very different and this must be understood to assess the competitive landscape.

In the NYSE model of a stock market, all trades in a specific NYSE stock are routed to a specialist and a floor broker. To trade stocks on the exchange floor, a brokerage firm must be a member of the exchange — in other words, own a seat on the exchange. Broker-dealers who don’t belong to the exchange can route their orders through a member firm. Trades are executed according to an auction style of market making
Here, the specialist is responsible for:
a) executing the trade
b) maintaining liquidity
c) maintaining the capital commitments for the stock

It the specialists job to know, with the help of the order book to which they have exclusive access, the constantly changing supply and demand for their stock. They must make certain that buy and sell orders are in balance, and that trading moves smoothly.

The NASDAQ model of an exchange is very different from the NYSE. NASDAQ is more of a model of many parts coming together as a whole. It is one of competing market-makers supported by a nation-wide system of quote screens. On average there are 16 market participants for every NASDAQ stock. There is plenty of competition—i.e. there are 323 market makers handling Microsoft trades, for example. The competing market makers are composed of 1) independent broker dealers (like market makers –but they do not commit capital); 2) market makers – major brokerage houses which commit capital ; 3) ECNs.

They all compete for trades based on best bid/ask. The problem with NASDAQ’s model is that there can be no one single dominant market participant. Competition is very high, and as ECN's have become more popular, they have eroded NASDAQ’s revenues from trade executions. When you hear of ECNs gaining market share this has been primarily a NASDAQ phenomenon and is occurring because the NASDAQ model allows this to be the case. A large portion of NASDAQ-listed stocks have been traded on regional exchanges and through ECNs in the last six years. Compare this to the NYSE who uses (or used to use) the trade through rule to grab an order from the ECN (because it listed a lower price) and hold it for 30 seconds –an eternity in the world of trading- allowing the price of shares to change before deciding if it would match the order.

The merger with AX allows the NYSE to retain the 25 percent share of NASDAQ trading.
Trading in NASDAQ-listed stocks has been fragmented since a series of reforms were enacted in 1999. NASDAQ has made an effort to defrag that market by acquiring several ECNs, among them Brut and the newly announced takeover of Instinet. In acquiring Inet, NASDAQ will gain a robust, leading-edge trading platform. Instinet has the leading technology on the planet, with response times of 5 milliseconds for incoming orders. With Instinet holding about a 24% share of trading volume in stocks not listed on the NYSE, the deal boosts NASDAQ’s market share to between 60% and 65%. But it does not give NASDAQ a footing in NYSE listed issues.

Does the instenet merger give NASDAQ any competitive advantage over the NYSE?
The NYSE has a much greater capability to trade unlisted securities than NASDAQ has to trade NYSE-listed securities. Not only is the NYSE gaining an industrial-strength E-trading platform with Archipelago's ArcaEx, but it's also gaining Archipelago's 22% share in unlisted trading volume. NASDAQ, by contrast, already had a decent E-trading platform of its own, and Inet's share of trading in NYSE-listed securities is insignificant.
Some are worried about a flood of companies leaving the NYSE to join NASDAQ but history suggests otherwise. From 2000 to 2003, 109 companies have moved to the NYSE from NASDAQ. In NASDAQ's 32-year history, only one company -- Aeroflex Inc., a Plainview (N.Y.) microelectronics company -- has moved to NASDAQ from the NYSE.

NASDAQ – And the uneasy relationship with market makers
Many of NASDAQ’s problems stem from its structure. Firstly despite being a for-profit company that has IPOd – it remains under the NASD stodgy regulators that keep it unable to compete with ECNs. Also, it jumped the gun on the IPO – and did so before actually receiving exchange status from the SEC. It is still waiting for SEC approval.
Unlike the NYSE, NASDAQ isn't an exchange -- a market with a single order book showing the trading interest in stocks among retail investors, mutual funds, pension funds, and hedge funds. At the NYSE, the vast majority of orders come together on the trading floor, where bidders fight to get the best prices. NASDAQ has no trading floor; instead it runs over a sophisticated telecom network linking about 600 customers in 1,000 locations. Quotes and orders come from three major sources as described above: market-makers, or dealers, such as the trading desks at Goldman Sachs and Charles Schwab , Capital Markets; the ECNs, some of which are backed by the big Wall Street firms; and online brokers such as E*Trade and AmeriTrade . NASDAQ collects and displays everyone's data, then consolidates them into a single tape.
Its new electronic trading system, SuperMontage was supposed to take on the ECNs but it didn’t work out this way because of NASDAQ’s conundrum that if it makes the best electronic trading system it will lose the market makers who give it its liquidity. The SuperMontage system lacked many of the features that attract big institutions to ECNs. Large traders don't dare advertise that they want to buy, say, 100,000 shares of Cisco for fear other players will bid the stock up. ECNs allow traders to trickle out orders without revealing their full hand. To avoid angering the market-makers, SuperMontage left out such features. This made SuperMontage irrelevant from day one.
The main issue for the SEC is "price-time priority," or making sure that customers who first offer the best price for a stock have their orders filled first. NASDAQ has never done that. For about a third of trades, dealers match buyers and sellers in their own order books -- without giving any other market participant a chance to fulfill the order. The resulting "internalized" trades are then reported to NASDAQ as done deals.
The SEC values price-time priority because it rewards the most aggressive buyers and sellers and produces fairer prices. It also ensures that market insiders don't ignore retail investors. The SEC has never approved an exchange that did not force orders to interact . But NASDAQ's market-makers count on these highly profitable in-house trades, on which they collect commissions from both the buyer and seller plus the spread between the buy and sell prices. If NASDAQ implements price-time priority, the whole market-maker model comes into question -- and all bets are off. Dealers are vital to NASDAQ because they keep trades flowing -- by posting quotes, maintaining an inventory in the stocks they handle, and putting up their own capital as buyer of last resort in disorderly markets. A market that depended solely on ECNs, which don't have such obligations, could break down under stress.

So NASDAQ is caught in a dilemma: The SEC may not let it become an exchange unless it alters how it works. But if it changes the way it works, megadealers such as Schwab and Knight Securities might flee, further reducing NASDAQ's relevance

Other Competition
The nagging ECNs
ECNs display customer orders electronically and provide access to substantial pricing information through their electronic limit-order books, which are accessible through the Internet. The firms directly match buy and sell orders without the intervention of human intermediaries such as Nasdaq market makers, the intermediaries who buy and sell NASDAQ securities. Island, an ECN specializing in the retail market, matches orders within its system. Archipelago, the fourth-largest ECN of the nine currently in operation, allows participants to interact with NASDAQ and all ECNs and allows orders to automatically go off the system if a better price exists in another venue. In addition, with no human intervention, orders are less likely to be mishandled. Market makers have the ability to manipulate the quote, delay the trade until the most advantageous time, and widen the spread. The ECNs avoid this problem by removing the market maker.

In general, automated trading systems free-ride on the process of listing, given that they generally trade only securities listed on other exchanges; furthermore, they sometimes free-ride on the price-discovery process given that members of exchanges may direct trade on ECNs to make some arbitrage or to operate in off-regular hours. But the main customers of ECNs seem to be institutional investors that generally are not allowed to trade directly on exchanges.

ECNs have taken some market share but an ECN has never taken the place of an existing exchange. Part of the problem is that while ECNs can display a better price than an established exchange is quoting, investors also want to know how many shares a price is good for: that is, how deep and liquid the market is. This is a big worry for institutional investors, which spend much time and money trying to minimize the risk that prices will move against them when they do a large trade (“price deterioration”, in the jargon). This is why ECN s, which were originally regarded as a huge threat to stock exchanges, have often failed to live up to expectations. Their prices have no depth, because they have little inventory.

Some believe the regional exchanges still have a chance. The combination of the NYSE and NASDAQ mergers and Reg NMS (with the extension of the trade-through rule to all exchanges) means that having the highest pools of liquidity will be a major advantage and this all puts real pressure on the small regional exchanges to survive. With respect to the ECNs, there is now only one ECN system left (TradeBook) (assuming the NYSE and NASDAQ mergers go through). But new ECNs may be developed and the financial barriers to entry are falling. The days of $100 million developments are over, and it is now possible to build a very nice facility, hardware and software, for under $10 million. But we should not forget that the ECNs arose in an environment that created a niche for them to exist in. They were the most successful under the NASDAQ system. They were able to take a little business from the NYSE while it was a non-electronic not for profit entity. But do they really have any chance against the NYSE now that the niche is closed with a new electronic NYSE? An instructive example is the TSX in Toronto. The TSX has been an electronic market for many years (it was the worlds first all electronic exchange). There is no real ECN competition to the TSX. Why is this? Because the TSX did not allow the niche to exist. People that worry about ECN competition for the NYSE are driving and looking through the rear view mirror and not the windshield. I have no doubt that a faster electronic system can be developed – admittedly better trading systems than the CME’s globex have been developed but they have not been able to take
business from the CME. The competitive advantages of liquidity cannot be overcome with better technology.

Valuation

First let me start by stating that an analysis of the new company, the New York stock exchange group inc, is very difficult for the mere fact that the company does not exist. The main criticism of this valuation will be related to the assumptions that need to be made. This is inevitable, as the company does not exist. The biggest risk to shareholders buying into the company at this point is that the company will not exist – i.e. the merger will be derailed. With that aside I will lay out my preliminary thesis as to the value of Archipelago (AX) shares as part of the new company.

It is important to point out that the combination of these two companies is greater than the sum of the parts. To merely value each as a stand alone and to add these together misses some very important points. First, and I believe most importantly is the fact that the NYSE becomes a for profit public company as part of this merger. The present revenues of the NYSE are absolute rock bottom revenue for this company. They are essentially not trying. What “trying” will add to the revenues depends on a lot of things but mainly on whether the years it has spent in the dwindles has mortally wounded the brand and the exchanges competitive advantages. I don't think it has and as far as capital market places is concerned; this is potentially the biggest in the world. The NYSE has the potential to become a truly global marketplace. The second point is of course the efficiencies that come about from taking NYSE revenues and running them through a more efficient electronic network. Operating margins of the NYSE are 3.4% while operating margins for AX are 22.1% - so its easy to see that if we could run the NYSE revenue through AX a lot more cash comes out the other end. But of course even something as intuitively obvious as this is not a slam dunk here. On the conference call, Thain insists that the two companies will run parallel. The NYSE will run just as it has for years with floor traders and AX will be a separate entity. There is no plan to merge the liquidity pools. Specialists on the floor will have no access to AX technology…..What the F&*%K!! That's right. Then there is mention that the market will decide whether they want to use floor traders or electronic networks. All I can surmise from this is that Thain is treading carefully. He does not want to tell the specialist that their days are numbered. It may very well be he will keep the specialists on for a long time and slowly phase them out – even at the expense of profitability. This may be the price that must be paid for this merger to work.

The two exchanges will form a publicly traded company that is 70% owned by the NYSE and 30% owned by Archipelago. Owners of NYSE seats will receive 70% of the stock in the new company and about $300,000 in cash, Thain said. All told, the NYSE will be handing out about $400 million to seat-holders. Archipelago shareholders will hold about 30% of the stock in the new company In order to value a company that does not exist I think it is important to focus on what we know is actually there. That means stay high up on the income statement. That's right – the revenue. As a combined entity the revenue of this company will be 1.076 billion (from NYSE) plus 528.6 million (from AX) = 1.6 billion in combined revenue.

Now it gets tricky. Yes I will make an assumption. But I think it is an educated assumption. I will assume the net margins of a public/electronic NYSE will be much higher than they are today. Because this will be controversial let me list the operating margins of the worlds exchanges.
Singapore exchange 52.8%
Hong Kong exchange 52.2%
TSX 51.5%
CME 50.1%
Australian Exchange 48.3%
ISE 41.2%
London stock exchange 36.4%
Deuche Borse 34.7%

Pretty impressive margins.
Even small players like Archipelago have had operating margins of 22.1%
The operating margins at the NYSE = 3.4% !!!
The reasons for this are (1) Not for profit entity (2) Non-electronic exchange – both problems will soon be fixed.

If we look at net margins of the worlds exchanges:

TSX - 33.2 %
ASX - 38 %
London exchange – 27%

If I had to pick a net margin number that the NYSE could eventually achieve, I would choose 20%. This is much lower than most of the worlds exchanges and I hope conservative. I think there is an equal probability the number could be higher or lower than this number. Now 1.6 billion in revenue at 20% net margins will produce and income of $320 million. The proposed NYSE Group will have roughly 160 million shares outstanding (47.8 million AX shares are worth 30% of company). AX shares closed at the time of this original valuation at $29. If the company can indeed produce this kind of net income then it only needs to grow income by 3% per year to justify this price. How much the company can grow is unknown. I believe however that a 3% growth in net income would be easily achieved. This is the crux of my belief that there is a margin of safety in the present valuation.

Transaction revenue forms the biggest part of the combined companies revenue stream. The company has guided that they intend to grow transaction revenue by 15% per year.

The company thinks growth will come from derivatives, corporate bonds, and new market listings that presently are going to NASDQ ie they will form a marketplace for small cap stocks on AX.

Companies like the TSX have stated income growth goals of 10% per year long term. (so far the TSX has beaten this bench-mark) If this company could grow net income at 10% per year long term (15 years) the present fair value of AX shares would be $52. And remember, because these companies operate with large operational leverage, (expenses are relatively fixed compared to revenue) an increase in revenue much less than 10% can achieve a 10% increase in net income.
My valuation is conservative for many reasons. I suspect net margins could go higher than 20%. The company has indicated that expenses of the combined company will fall $100 million a year for at least the first three years.

Valuation Model 1- The TSX

The present market capitalization of the TSX is $1.2 billion. The US economy is 10 times larger than Canada and on this basis one would expect a market cap for the NYSE of $12 billion. At an AX price of $30 per share, this put the NYSE group capex at $4.8 billion and potentially more than 50% undervalued. Of course this is simplistic as the NYSE may operate as a duopoly while the TSX is more of a monopoly – but the NYSE also has more potential as a global marketplace than the TSX.

Valuation Model 2– The London stock exchange

The UK GDP = $1.782 trillion (2004 est.) while the US GDP 2003 is $11.75 trillion. Roughly the US economy is 6.6 times larger than the UK.
In terms of growth at the LSE. Operating profits are growing 17% 2003 to 2004 and revenue growth was 6% 2003 to 2004. Again one sees the effects of operational leverage with small incremental revenue growth leading to larger operating income growth. The total 2004 revenue of the London exchange = 237.1 million pounds (which converts to $434.2 million revenues). To adjust for size of economy multiply by 6.6 which gives you $2.86 billion. This makes the present NYSE market cap only 1.7 times sales.

Valuation Model 3 – Europe

The whole US market is about the size of all of Europe.
It is estimated that all European exchanges had combined revenues of some ~EUR 5.2bn in 2002 (which converts to $6.4 billion US ). Profit margins were 26% for the combined European exchanges. This comes to $1.66 billion US in profit for the European exchanges. If the NYSE could do half this revenue at similar margins this would result in earnings of $830 million. The recent $5 billion market cap would give the NYSE a very

low PE of 6. The euro-zone is roughly equivalent to the US economy therefore this is not an unreasonable comparison. (note some of these revenues are certainly going to derivative exchanges which in the US are dominated by the CBOT and CME – as such I do not expect the NYSE to attract these revenues and this is why I chose to half the total European revenues). Even if you thought the NYSE would only get one quarter of these revenues then this gets you to a PE of 12. Does that seem appropriate for the NYSE?

Breaking down the revenue

The above valuation based on present revenue of the NYSE. Keeping in mind that the US economy is 10 times larger than the Canadian economy, it is interesting to compare the revenue components of the NYSE and TSX.
In listing fees the NYSE has $320.9 while the TSX generates 40% of this at $127.1 million. In terms of Data processing fees The NYSE generates $220.7 million but there is no good comparison here with the TSX and this is charged by SIAC (NYSE subsidiary) to the customers other than NYSE under a cost recovery model. In terms of
Market information fees the NYSE generates $167.6 million vs. the tsx $58.7 million which is 35%. In terms of Trading fees the NYSE generates $153.6 million vs. the TSX $92.6 million – which is 60.3 % of the NYSE trading fees!! With an economy one tenth the US economy, the TSX is generating revenue that is close to NYSE revenue. Is the NYSE really trying. Can it do better as a for profit entity. I think that it can!

Growth.
More and more countries are acquiring the “cult of equity”, since they have decided that the process of people putting money into the stock market and companies is the best mechanism for allocating long-term capital within their economies. Also, greater application of quantitative trading strategies is overall increasing trading volumes on exchanges.

The graph below is instructive in that even in one of the worst bear markets in history in Japan, the volumes of shares traded on the Tokyo exchange increases by 8% annually.

Other potential revenue streams that do not yet exist
There will be multiple other sources of revenue that are not presently part of the NYSE revenue stream but that will likely contribute greatly to the new public company.

1) Information Technology (IT) sales
IT sales provide an area where European exchanges have been able to leverage their IT investments. Scale is still important in this business, and IT investments at exchanges are quite heavy. Selling IT is a smart strategic play that leverages that investment over a larger base and also builds relationships between exchanges. The NYSE will be poised to provide technology to exchanges around the world, with the addition of Archipelago's top-notch IT department

2) Options and derivatives
The merger gives the NYSE an entry into the options business as AX has gained the options market of the Pacific exchange through an earlier merger. This market is growing rapidly. The idea of trying to put together cash and options into one single product or have a closer affiliation may have some cost advantages and product advantages. This allows some very interesting cross-derivative and cash-product capabilities that could draw liquidity from the ISE, BOX, Amex, Philadelphia Exchange and the CBOE. Trading simultaneously in more than one type of product could be the wave of the future for broker-dealers. This one-stop-shopping for your trading may have advantages.

Derivative volumes are rising strongly, driven by greater sophistication in risk management, new products on-exchange and modest cannibalization of the cash markets. Whilst some of the growth in derivatives is cyclical, and therefore may decline, the underlying secular trend to greater risk management is dominant.
However, historically this has not worked in the past for the NYSE so this could be a risky area. The options game, is a sector the NYSE entered and exited rapidly in 1997 when it sold its options business to the Chicago Board Options Exchange. John Thain said the exchange has been exploring where to trade options and that it will likely trade them on the ArcaEx platform. The fact is that the options business is the most competitive sector of the securities markets today— CBOT main competitor – but this could lead the CBOT to enter equity trading or partner with another exchange.
3) cross-listing (see below)

4) Growth from listing smaller companies. Smaller companies that were being turned away from the NYSE will now be listed on the archipelago exchange. This business was previously being lost to NASDAQ.

5)Hidden pricing power
On the NYSE a foreign company listing 15,000,000 shares at a price of $41 per share would pay an initial listing fee of $130,100 and an annual listing fee of $24,260(Werner and Tesar, 1997). This is as of 1997. Still $24 thousand a year is not a significant amount. Would most companies walk if these fees went up 10%? 20%?

6) Data, data, data!!

The mistake Mr Grasso thinks may have cost the NYSE most has been its failure to recognize that its greatest assets are its data. The exchange gets a mere $167m a year from selling its tape of share prices to outsiders, who then reconfigure the information and sell it on, earning, by some estimates, over $20 billion. Imagine, says Mr Grasso, if the NYSE had capitalized on this data: it would have so much money coming in that it could let people and companies trade and list free, creating even more data to sell. He intends to make up for lost time: “We are in the data and media business.”

The exchange wants to regain ownership of its share-price data by withdrawing from the Consolidated Tape Association, a mutual organization run by all America’s regulated exchanges, which sells their combined data. It is also looking for new ways to make money out of other data that it collects, including its “limit order book”, which includes all as-yet-uncompleted orders to buy or sell at a pre-specified price, and which is now available only to the floor specialists.

7) The electronic transformation

The rapid advances in communications technology will continue to have a major effect on exchanges. Eventually at the NYSE we will replace the 3,000 people on the floor of the exchange with a nice, big Unix server. The continuing move to electronic trading is likely to boost volumes and reduce costs, but also potentially increase the threat to exchanges from ECNs and other alternative trading systems

8) Changes to rules on trading fees

While average daily volume was up 4.6% in 2004, trading fees, which are paid by members and member organizations based on trades executed at the Exchange, showed a 2.3%, or $3.6 million, decline. Equity trading volume is the principal driver of trading fees; however, the current pricing structures inhibit the NYSE’s ability to generate revenue growth during times of high trading activity or to grow via the introduction of

new products such as Fixed Income. The NYSE states in their annual report that these rules will be readdressed. Therefore these fees could increase substantially.

Cross-listing

It is a mistake view the NYSE as a US exchange. This is likely to become an international market. The old geographic concept has less and less meaning due
to the progressive integration of financial markets, instruments, and intermediaries as well as technological changes that allow for electronic trading. It no longer matters where an exchange is geographically
From 1986 to 1997, the number of U.S. companies listed in Europe decreased by one third. Over the same interval, the number of listings in Europe by non-U.S. and non-European companies rose by a modest 5 percent, while the corresponding increase on U.S. exchanges was 131 percent European companies appear more likely to cross-list in more liquid and larger markets, and in markets where several companies from their industry are already cross-listed. They are also more likely to cross-list in countries with better investor protection, and more efficient courts and bureaucracy, but not with more stringent accounting standards.

In1995, NYSE had 252 non-US companies listed from 40 countries against 406 in 1999. Cochrane, Shapiro and Tobin (1995) identify two causes for this: firms are looking for equity as a source of finance, more so now than in the past, and US investors are more receptive to invest in foreign equity.

For companies from certain countries – with less mature markets- an NYSE listing should imply better reputation in the capital market, more abundant outside equity finance and possibly lower cost of capital.

“We aim to be the number two market for every major non- US stock,” says Mr Grasso. There are now 400 foreign firms listed on the Big Board. For a few firms, notably some from Latin America, the NYSE accounts for the largest part of the global trading volume in their shares. Unlike merging, which is fraught with business and human dangers at the best of times, this strategy of attracting foreign listings depends on doing what the NYSE should be doing anyway, but has done only slowly: providing liquidity, lowering costs, delivering best prices and extracting value from its data.

Sarbanes-Oxley

The extra-territorial extension of U.S. securities law through the Sarbanes-Oxley Act to foreign companies that are either cross-listed on U.S. exchanges or listed through depository receipts has created a great deal of tension in Europe. This is likely to be a setback to the increased harmonization of securities regulation between the two
largest markets in the world. I hope that the U.S. and Europe will not get into a tit for tat.
Sarbanes-Oxley will certainly be a deterrent for foreign countries cross listing on the NYSE. I expect the NYSE to pressure congress to make changes to Sarbanes-Oxley which will make it less onerous.

The future

Because liquidity is likely to beget more liquidity, smaller exchanges will likely die or be acquired. The NYSE merger with AX, and the proposed deal between Instinet and Nasdaq, does not bode well for regional exchanges, like the American Stock Exchange. The strength of the smaller exchanges has been in trading products like exchange-traded funds, trading that Archipelago can do faster (and for which AX already has a significant share of trading - Archipelago is the leader in ETF trading, with about 30% of the market as measured by shares traded daily-), and in listings for smaller companies, which will likely be decimated.

As far as floor trading is concerned, the floor trading will likely slowly decrease (much as the cme) but there may be some demand in some areas. Mr. Thain points out that a few hundred stocks which trade huge volumes and are highly accessible trade better electronically while less popular stocks tend to benefit from a system where individuals create demand for stocks. There is some evidence to support this assertion.
We are likely to see a 24 hour global stock market based on alliances between nyse, European and Asian exchanges. There will no longer be such a thing as a closing price for a security. If the UK continues to reject the Euro, the London exchange may end up being the last exchange to take part in the European exchange consolidation which is now occurring, this could lead to a merger of the London exchange with the NYSE to from a true 24 hour transatlantic market. The payoff of such a 24 hour exchange for individual companies will be access to broader pools of capital and more liquidity in its shares.

Such a 24 hour exchange also eliminates, the fragmentation of liquidity that, along with high costs, is such a problem when a company goes the ADR route. And it significantly reduces the costs to issuers. All of this adds substantial value to a listing. The payoff to the exchange is more annual fees from more listings. The involvement of the US market is critical for making the 24 hour exchange eventually a reality because the US market represents 58 per cent of the world’s market cap. The US regulators have not embraced this idea – but I believe they will eventually.

Risks:

-REGULATION

As a highly regulated industry, it will continue to be shaped by government policies. Exchanges must comply with the usually expensive and sometimes unpredictable requirements of their regulators. These problems are likely to increase as exchanges pursue cross-border transactions, sometimes seen as the best route to growth for an exchange that is dominant in its domestic market.

The other big issue under this category is antitrust. For the New York Stock Exchange to merge with Archipelago, an electronic market that trades Big Board stocks, antitrust regulators will have to be persuaded that the relevant field of competition is much larger. That is one reason CEO John Thain, talks of a global market, although there is little foreign competition for listing or trading American stocks.

-INTERNALIZATION

The NYSE may, in short, be the most liquid exchange simply because it is the biggest. On the other hand, some financial institutions are so big that it would take only one or two (a Vanguard or Fidelity, say) to switch to an alternative venue to do serious damage to the Big Board’s liquidity. The NYSE could lose 30% of its volume overnight—and its dominant position, once lost, might never be regained. Without the economies of scale, its overheads would soon turn it into a decidedly high-cost provider. Internalization (The matching of orders in their own books by large broker-dealers is seen by some as one of the biggest threats to exchanges) Internalization still requires an exchange for price discovery, and may attract the attention of the regulators, but it has the potential to remove considerable volume from exchanges.

-ECNs

Technology has changed the world of stock exchanges. But I think the ECNs may be less of a threat going forward. I believe the ECNs came into existence because there was a niche created for them by the fact that all the worlds exchanges had not kept up technologically. The exchanges were run as government utilities and not enterprising for profit companies. This has changed and I suspect the niche filled by the ECNs is about to close quickly. Beyond just ECNs, the true threat to exchanges like the NYSE comes not only from other exchanges like the nasdaq, but also electronic market places like Ebay and Yahoo where buyers and sellers can be brought together. This is another source of competition, partially real and partially potential, by intermediaries acting as brokers that try to exploit the Internet to offer customers the chance of trading directly.

Cannibalization and destruction of Brand:

There is some concern that the listing of smaller business could cannibalize the exchange's lucrative listing business. ''N.Y.S.E.-listed companies pay a lot of money to get that brand -- the N.Y.S.E. brand. If they offer a 'N.Y.S.E. lite' listing as they are planning to do for smaller companies on the AX platform, their existing listed companies might put pressure on them to lower their fees.

Despite these risks and the competition, the SEC does not want fragmentation of the equity market. If a rule it has made is leading to more fragmentation the SEC would likely take a hard look at it and change it – markets work better when they are concentrated. It leads to better price discovery and tighter bid-ask spreads and the SEC knows this. A concentrated market is in the publics best interest as long as the fees charged aren’t too outrageous. Could you imagine the equity markets becoming like the bond market. Because of these fears I believe the NYSE monopoly would likely be PROTECTED by the SEC as an issue that is in the public interest. This is the best of all worlds – a monopoly likely to be protected by regulators.

There have been many comparisons of this business to the cme. This is understandable as the cme is the only other large public American exchange. But the nyse will never be as great a business as the cme which is a dream business – the reasons why include:
1) derivatives use is growing much faster than trading in equities

2) the cme can create a product out of thin air – yes it takes research to sort out what traders and hedgers want/need – but beyond that there is not much capital needed and it just becomes another link on a computer – the NYSE is dependent on new IPOs to create new “products”.

3) Listing on the cme aren’t fungible – i.e. if you buy it on the cme, you have to sell it on the cme - whereas equities can be bought and sold in many other ways – internal trades, other exchanges.

4) The exchanges best able to withstand the threats from internalization, ECNs and the like will be the derivatives exchanges such as CME and Euronext.liffe. And their complex, innovative products will be much harder for upstart ECNs to reproduce than simple cash trades.

Barrons sees potential CME/NYSE Group

2005-07-02T23:57:00.000-04:00

An article on Barrons today says "not to count the NYSE out [of a CBOT deal]. . ." Explains that AX gives NYSE entry into options not futures.

The CME, CBOT, and the Wardrobe

2005-06-29T17:11:00.000-04:00

Today's CME movement, largely attributable to a call from Jeffries for the stock to trade at $344/share (nice round number), is predicated on the assumption that they'll be taking out CBOT and accreting earnings in short order.

All this from the CBOT's disclosure that it recently received an expression of interest in a business combination from an undisclosed party. To be sure, this is one way to stimulate interest in your company's IPO. They didn't say it was CME, but Jeffries did.

Harken back to April 22, 2005 when (historically proven contrarian) Charlotte Chamberlain from Jeffries told us that AX would "underperform" when the stock closed at $16.85. With AX sitting at more than twice that on 6/29/05 there's (even more evidence) that this clown hasn't a clue when it comes to innovative financial service offerings.

First, the CBOT is not a public issue and therefore is not bound by the same regs as public companies. There won't be any audit to check the validity of an offer, but lets assume there was an offer. CME would be in the running, the Philly Exchange would be in the running, and Arca/NYSE, as well as Nasdaq/Inet would have to be considered potential buyers. Nonetheless, Jeffries couldn't say that AX might've been the offer that the CBOT received because that would blow their call entirely -- the Street might wonder how did she not see this coming on 4/22/2005.

I'm not claiming that AX made the CBOT an offer, I am just making the point that there is simply no fact that the CME is who expressed interest in buying the CBOT -- yet the stock took off with the notion that it could be. Maybe it's because they're both housed in Chicago that Jeffries figures it'd be CME.

AX announced yesterday that they are going to offer penny pricing for options -- that'll make them the first to do so (others use .05 or .10 increments). This means that margins are going to be squeezed even more, so volume will have to make up for things. AX knows that market share is the name of the game (see my previous blogs from many months ago), and they'll end up winning share in the options market -- taking away from those exchanges that don't use pennies. They've (we've) demonstrated their (our) ability to make a splash in trading everything from CPU power to options to ETFs. These guys are trailblazers and have demonstrated the ability to execute. How many options exchanges do we really need? For that matter, how many stock exchanges do we really need? Try to think ahead 20 years to how the NMS will look. Recall that at one point, putting phones on the floor of the NYSE was revolutionary. Disseminating market data to centers around the world was an incredibly revolutionary occurance when the NYSE first began doing so (also a new stream of revenue for the exchange).

Look here (scroll down to the PPT slides) for a timeline of innovation in the US equity markets. In 1964, new high-speed tickers (twice as fast as the old ones) were installed at the NYSE. Point being, the NYSE does innovate and when they do, they improve the national market landscape. By merging with AX they are able to continue their long-standing tradition of being leaders in the markets they serve.

If you have a second, please post a comment here regarding what you think would happen if it becomes known that it's AX that's after the CBOT. . .

January 2006 $65 call premium -

2005-06-22T12:18:00.000-04:00

Interesting take on the street's perception of a deal going through and the value of the new combined company -- the 65 Jan '06 calls are asking $1.00 as of 12:05 PM on 6/22/2005 when the stock is trading at ~$40.

The call is ~25 toytles outta the money. To be sure, catalysts leading up till then include: at least another rate hike (market should be relieved after the ninth inning), arca/nyse proxy will be released, regulators'll approve the merger, langone will be (even more) "long gone," analysts will start to understand the market potential (and press coverage will be heightened), NYSE Group IPO will be priced, nyse seat holders will sell their seats for (around) 70% of the new exchange, the NYSE will transform to a "for profit" company, and regulation nms will be digested.

In the meantime, Nasdaq/Instinet will be a larger ECN and a non-issue in the duopolical landscape (read the fifth to last sentence on). The NYSE Group should emerge as the most innovative market in the world and their (read: our) footprint will expand overseas as well as in the US.

Piper Jaffray as contrarian indicator -

2005-06-17T16:55:00.000-04:00

Looks like the numskulls at Piper Jaffray think anyone trusts their opinion on Arca. Here are some examples of their most recent ridiculously wrong calls:

On May 4, 2005 Piper downgraded Arca from "outperform" to "market perform." The target price was adjusted to $31 from $24. Refresh your memory here: http://tinyurl.com/aaxxg

On September 23, 2004 Piper initiated coverage of Arca with a "market perform". The target price was set to $17. Read about this idiotic call here: http://tinyurl.com/awq8o

The table below depicts recent evidence of analysts that have lost all credibility as they have failed dramatically to understand Arca's business, market, and stock (yet still publish their ignorance for idiot retail brokers to use and mislead their clients).

Without further ado, here's a list of losers who've recently opened their proverbial mouths and removed any doubt that they haven't a clue. The truth is, a 4 year-old could be just as accurate as these clowns. When you're wrong, you're wrong.

Date	Knucklehead	Downgrade	Closing price that day (Today's closing price $39.53)
9-May-05	Keefe Bruyette	Mkt perform	$32.87
4-May-05	Raymond James	Underperform	$33.88
4-May-05 22-Apr-05	Piper Jaffray Sandler O'Neill	Mkt perform Sell	$33.88 $16.85
22-Apr-05	Jefferies & Co	Underperform	$16.85

ETFs and Arca/NYSE -

2005-06-13T08:55:00.000-04:00

Dow Jones/MarketWatch has an article about the opportunity for Arca/NYSE to dramatically increase their market share in the $220 billion business of ETF trading (6/13/05).

As social security becomes more of a self-directed, "Lifetime Savings Account" ETFs are bound to increase in popularity.

Arca and event-stream processing -

2005-06-13T00:38:00.000-04:00

To be sure, there is value in being able to digest, analyze, and act on huge flows of data on the fly, in real-time. There is a burgeoning technology called "event-stream processing", or "ESP," if you're cool, - and ArcaEx's is all over this in yet another example of management's prowess.

PC Magazine runs an article touching on this in the 6/28/2005 edition. Here's the article:
http://tinyurl.com/c34c5

Also, in case you haven't seen the 6/13/05 Journal: There's an article about the potential boom in deriviative activity and they discuss the NYSE ability to delve into these markets via its Arca deal. It'd be interesting to hear what Langone's idea for entering these markets is without Arca? It's becoming clearer each day that the NYSE will be ArcaEx with a new name.

Putnam for Time Man of the Year?

Sandler O'Neil's conference notes -

2005-06-09T02:02:00.000-04:00

Here's a powerpoint presentation that AX gave on 6/7 @ the Sandler O'Neil Financial Services Conference (remember, sandler employs the incredibly-wrong analyst, Rich Repetto, that downgraded AX on 4/25 when they were trading @ 29 and change).

Note the slide, "Creating a Market for the Future."

The engines are just get getting started. This is one hell of a growth story!

Form 425 and analyst accountability

2005-05-28T12:05:00.000-04:00

First, sorry that ArcaNews has not been dynamic lately -- we just had our first child 3 weeks ago (found out her delivery date on the day AX/NYSE announced their merger -- talk about a glorious day!) and I haven't had much time to blog.

we haven't heard from the Jeffries' contrarian clown, Charlotte Chamberlain. How much longer will The Street give her any credibility?

On April 25, 2005 AX filed a Form 425 with the SEC. Thought its a month old, it helps illuminate some of what Gerry and his team have in mind. This link is pretty cool as it can take you to specific areas of the form such as zooming right to the mis-guided, Sandler O'Neil analyst, Rich Repetto, who downgraded AX on April 22, 2005 (to a sell when the price/share was $29.76!).

While we're on the topic of analysts who advertise their ignorance by downgrading AX on 4/22 when the stock closed at $29.76, we haven't heard from the Jeffries' contrarian clown, Charlotte Chamberlain. How much longer will The Street give her any credibility?

How Langone can make AX/NYSE deal 26/74 instead of 30/70

2005-04-29T14:37:00.000-04:00

How much more of the NYSE Group do Langone and his nay-saying pals think is reasonable? Would an extra 4% satisfy them. Considering that the value of their NYSE seats has sky-rocketed since the merger was announced on 4/20 it's gonna be tricky for Langone to convince anyone that the merger is a bad idea.

If Langone has $200mm available to thwart an AX/NYSE merger, he could unilaterally go out and by that many dollars worth of Arca stock. Assuming he could buy AX for $32/share he'd get about 6,250,000 shares, or ~13% of AX's market cap for $200mm (at $32/share and 47.14 million shares outstanding, AX's market cap is ~$1.5 billion).

13% of 30% (of The NYSE Group that belongs to AX shareholders) is ~4%. This would essentially turn the deals terms to 26% of the NYSE Group for AX shareholders and 74% of the NYSE Group for NYSE shareholders.

Sun Micro/ArcaEx deal and NYSE accretion

2005-04-28T13:09:00.000-04:00

In early February, Sun Microsystems inked a deal with Arca. This deal created the world's first platform to buy and sell blocks of computing power at market prices. The Financial Times said the new exchange would be operational in three to five months from the time the aforementioned article was published. That means by August, this futuristic, high-margin line of business should be chugging along. The Financial Times also reported that a speculative market for computing power futures likely would emerge once the exchange was established.

There really wasn't much buzz about it, but as the article in the link above states, some analysts see the market for auctioning computer power exceeding $4 billion. The dinosaurs who rule the NYSE have no clue what this market is about, but won't need to with this merger. This type of intrinsic value that NYSE shareholders get out of this deal will only baffle folks like the non-sophisticated, Langone team.

The earnings that this deal with Sun produce will be accretive to the earnings of the NYSE. It also gives NYSE shareholders entry into a new, high-margin, growing market.

Shades of Yahoo and Google

In some ways the AX/NYSE v NDAQ/INGP duopoly is similar to the YHOO v GOOG duopoloy. YHOO has numerous streams of revenue while GOOG has only one. AX/NYSE has numerous streams of revenue with this merger (i.e., computing power, traditional exchange revenue, options, and other derivitiaves). NDAQ/INGP has one revenue stream (it's multiple streams, but one category -- "traditional exchange revenue.").

John Jakobson, seat holder, on CNBC

2005-04-27T11:06:00.000-04:00

At 11:06 AM EST this morning, CNBC's Bob Pisani interviewed John Jakobson, a NYSE seat (read: share) holder. Mr. Jakobson said that he didn't feel the 30/70 deal was a sticking point -- he said, "of course we'd like more, but I don't see that part of the deal changing."

He went on to say Goldman Sachs is the "preeminent investment bank. . .they can do this [the AX/NYSE deal] better than anyone else."

Seems like the counter-bid hype is starting to wane.

Background: William Donaldson, Chairman of the SEC

2005-04-27T10:28:00.000-04:00

The quarterback for Regulation NMS, William Donaldson is a pioneer in creating an atmosphere for US equity markets to evolve. His experience includes serving as CEO and chairman of the NYSE.

To be sure, he has plenty of relationships with NYSE shareholders (i.e., seat holders) and other titans of Wall Street. After more than a year, Donaldson and his team persuaded these folks to see modernizing the current US equity markets as critical. The NYSE and Arca were way out in front of these new regulations, and their plan to merge is fertilized by the egg the SEC laid on April 6, 2004.

And as far as the time table goes, the NYSE has set the date of April 10, 2006 for testing of their new Hybrid system to commence. The sooner the ArcaEx integration can begin, the more likely Thain is to meet this time frame.