Within days of the dust settling from the SEC's passage of the package of rules known as Regulation NMS, the New York Stock Exchange surprised the Street with its announced merger with Archipelago.

The merged entities will form a new company, to be called NYSE Group, which will be publicly traded.

NYSE's chair, John Thain, says, "This transaction, transforming the NYSE into a public for-profit entity, is an essential step to maintain our global competitiveness and leadership."

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Bill Cline, Global Managing Partner for Accenture's Capital Markets Practice says, "To me it was a very clever and savvy deal by the NYSE. In one shot they got 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 timing of the deal, coming on the heels of the passage of Reg NMS and the extension of the trade-through rule to all U.S. equity markets, was not a coincidence.

Archipelago (Arca) was a vocal opponent of Reg NMS since the extension of trade-through to the Nasdaq was going to make it difficult for Arca to fulfill its public statement of taking share from the NSYE.

This merger also upends competitive perceptions among the exchanges.

The Nasdaq and other exchanges and ECNs (electronic communications networks), indicated through public comment that they considered the period of time that it would take the NYSE to implement a hybrid market as an opportunity to take share from them.

With the Arca takeover, the NYSE erodes most of the arguments against it, most of which involved speed and certainty of execution.

Arca 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.

Trading in Nasdaq-listed stocks has been fragmented since a series of reforms were enacted in 1999.

A large portion of Nasdaq-listed stocks have been traded on regional exchanges and through ECNs in the last six years.

Nasdaq has made an effort to defrag that market by acquiring several ECNs, among them Brut and the newly announced takeover of Instinet.

With the merger of the NYSE and Arca, though, the liquidity in Nasdaq stocks is going to center on the two hubs provided by NYSE and Nasdaq.

Cline says, "I think the combination of this deal and Reg NMS, and trade-through specifically, puts real pressure on the regional exchanges to survive."

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