The Trading-Floor Tradition

How will this merger change the trading floor tradition at the NYSE?

Larry Tabb of The TABB Group says, "I don't believe that this merger will hasten, slow, or radically alter the NYSE's desire to move to a hybrid market structure, or to force the NYSE to jettison the floor and go fully electronic."

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Tabb points out that the NYSE already has a matching engine for electronic orders, called Direct Plus, which is currently responsible for approximately 10 percent of the NYSE order flow.

Tabb states, "The reason they don't move to a more electronic platform is not that they can't; it's because they believe it to be in the benefit of the auction model."

Tabb believes that politics was the logjam in the NYSE's move to a more automated market.

NYSE's floor trading can add value for illiquid, thinly traded issues, and in big block trades where price improvement can be achieved on the floor.

Depending on how much of the flow goes off-floor and electronic, there might be less-than-necessary critical mass on the floor to operate efficiently, or to cost-justify maintaining and evolving the floor.

If the floor continues to play a useful role, it's a win for the NYSE since it's a differentiating factor for them that no competitor will duplicate.

The merger gives the NYSE front-end technology, with Archipelago's aggregation and direct market access capabilities.

It also gives the NYSE an entry into the options business, which is growing rapidly.

Tabb says, "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."

Tabb believes that derivatives may very well be the next battleground, and the possibility of developing a combined cash and derivative business provides the NYSE with interesting product, arbitrage and profit possibilities.

Next Page: Going public.