The New York Stock Exchange announced yesterday it will merge with Internet-based marketplace Archipelago Holdings Incorporated. The historic deal would convert the not-for-profit, member owned NYSE into a publicly traded company, to be called NYSE Group, offering customers both traditional floor trading and Archipelago’s “Arca-Ex” Internet-based system of trading stocks, options, and derivatives, according to the stock exchange’s chief executive, John Thain.

The new company would be 70% owned by the current members of the stock exchange and 30% by Archipelago’s shareholders under the agreement, which is subject to regulatory approval.

NYSE Group would retain regulatory authority over member firms and listed companies, in a spun-off, not-for-profit subsidiary.

“I think the regulatory structure we’re proposing will be a model for other self-regulating agencies,” Mr. Thain, a former chief operating officer of Goldman Sachs who became CEO of the stock exchange in December 2003, told reporters.

The exchange’s members, whose purchase of a so-called seat gives them the right to buy and sell stocks on the floor, will be offered a combination of cash and stock in the conversion into a public company. The cash portion of the offering would be about $400 million, giving the 1,366 seat-holders about $300,000 each.

Mr. Thain refused to speculate on the value of the new exchange. Archipelago has a market value of about $884 million. Exchange seats sold for as low as $975,000 late last year before rebounding to $1.65 million this year. In 1999, a seat traded for $2.65 million.

The exchange’s new president, Mr. Thain, did not concede that the NYSE system of specialists – floor traders who are responsible for making markets in stocks – was failing. Rather, he referred repeatedly to the NYSE’s need to take “concrete steps to maintain our global competitiveness and leadership.” Nonetheless, he acknowledged that the 212-year-old specialist system would essentially be eliminated, with licenses issued to those floor-traders who are interested in making markets, and with the exchange maintaining much more control over their roles.

The specialist system has been wracked by scandal in the past two years. Fifteen specialists were indicted April 12 on federal charges of placing trades in front of customer orders, allegedly resulting in $20 million in profits. That came on the heels of a settlement in March 2004 in which the five largest specialist firms agreed to pay $241 million to resolve allegations of illegal trading. Two weeks ago, the Big Board ordered video cameras installed at specialists’ trading posts to monitor their trading.

The initial sentiment among the floor’s hundreds of traders and clerks was that the brokers who specialized in trading strategies, such as executing large trades driven by convertible arbitrage or merger arbitrage, would have a decent future. One estimate was that between 200 and 300 brokers and clerks would leave the Big Board over the next two years.

The proposed merger also was seen as a way for the stock exchange’s leadership, particularly Mr. Thain, to move ahead from the compensation scandal surrounding the former chairman Richard Grasso, who has been accused of misleading the exchange’s board of directors to exact a total of $187.5 million in compensation and severance.

The deal announced yesterday would give NYSE Group the ability to control 25% of the trades on the stock exchange’s bitter rival the NASDAQ market, as well as to capture trading commissions in the trillion-dollar market for derivatives. Derivatives are securities that derive their value from another asset, such as stock price movement or interest rates.

The vision sketched out by Mr. Thain and Archipelago’s CEO, Jerry Putnam, in which investors could seek out the best price for trading their NYSE stocks either on Archipelago’s Arca-Ex Internet system or via NYSE, simply speeds up the process of making more of the New York Stock Exchange’s stock trading electronic. Mr. Thain had begun the process of wresting control away from floor traders with his “hybrid marketplace” proposal last August, which would have investors’ buy and sell orders processed electronically, without any role played by a specialist or floor trader in completing trades. Currently, just 10% of the trades on the Big Board are executed electronically, using the exchange’s three-year-old NYSE Direct system.

“I knew this is where they had to go. What surprises me is that they did it so quickly and in this format, but I’m pleasantly surprised,” the chairman of Caldwell Asset Management Inc., Tom Caldwell, who is a seat-holder and frequent critic of the NYSE, told the Associated Press. “I’m going to have to find someone else to fight. I haven’t seen enough to have had any concerns, but this is a very interesting deal, and I’m glad John Thain caught on to the vision we had for the exchange.”

With the Nasdaq reportedly in talks to acquire Instinet, another electronic exchange owned by Reuters Group PLC, the stage is set for the NYSE and Nasdaq to compete head-on in America while giving the NYSE Group a stronger global standing, according to Vincent Phillips, chief executive of Charles Schwab’s CyberTrader subsidiary.

“I think this will be great for retail investors and institutions, because you know the NYSE and the Nasdaq are going to compete very aggressively,” Mr. Phillips said. “Yes, it reduces the number of players in equity markets. You’d rather have 10 really large players instead of two. But I think the benefits will outweigh that concern.”

The move also gives the stock exchange the electronic component needed to compete with all-electronic exchanges around the globe, most notably London’s and Frankfurt’s, according to a partner with the securities industry consulting firm Accenture Capital Markets, Michael Henry.

“This is definitely a great move to position the NYSE to be more competitive globally,” Mr. Henry said. “The NYSE will offer the electronic aspect, but also a compelling human trading system that has kept prices less volatile than on other exchanges. It will be a wonderful experiment to see how that plays out against other global markets like London and Germany.”

The proposed merger is expected to offer $100 million in savings in both 2006 and 2007.

`The NASDAQ has been stepping on the New York’s turf,” the head of electronic trading at Credit Suisse First Boston, Dan Mathisson, told Bloomberg News. `This would allow them to get on the NASDAQ’s turf.”

“Dick Grasso won a lot of plaudits for keeping the horse-and-buggy-whip system alive,” the special counsel at proxy adviser Institutional Shareholder Services, Pat McGurn, told the Street.com.

The deal announced yesterday, Mr. McGurn said, “probably pushes them the final step along the way” toward modernization.

The transaction appeared to have support beyond the investment community. Senator Schumer, Democrat of New York, said in a prepared statement: “This is a giant step for the NYSE in maintaining and expanding its market share. It is important not only for New York, but also for keeping the financial markets fast, efficient, liquid, and especially transparent.”

Investors have long had a problem with allowing the NYSE’s management to oversee both the exchange and its regulatory body, Mr. McGurn said. The feeling among investors was that the exchange faced a conflict, Mr. McGurn said, between policing listed companies and looking after its own commercial interests in ensuring that as many companies are listed as possible. Separating those two functions “has to be a positive from an investor standpoint,” he said. The only concern about the split is whether the exchange or the regulatory body will control listing standards in the future, Mr. McGurn said.

Pending regulatory approval, the NYSE-Archipelago merger is expected to be completed in either the fourth quarter of this year or the first quarter of 2006, Mr. Thain said. Three board members of Archipelago would join the NYSE board.

Mr. Thain would remain as CEO of NYSE Group. Mr. Putnam, Archipelago’s chief executive, would become one of three co-presidents. The New York Stock Exchange’s chief financial officer, Amy Butte, would become executive vice-president of strategy and product development, while Archipelago’s CFO, Nelson Chai, would assume that role for the NYSE Group.

Shares of Archipelago jumped 8% to $18.30 in trading on the Nasdaq Stock Market. The Wall Street Journal reported the Archipelago transaction before the close of regular trading.

Archipelago opened its stock-trading network four hours earlier this month, at 4 a.m. Eastern time, adding to pressure on the New York Stock Exchange to allow earlier trading on the world’s biggest exchange as well. The exchange now opens at 9:30 a.m. and closes at 4 p.m. Earlier trading, Mr. Thain said, is something still under consideration.

Both companies reported earnings yesterday. The NYSE said first-quarter net income more than doubled, to $24.9 million from $11.5 million a year ago. Archipelago said first quarter profit rose to $13.2 million, or $0.28 per share, from $12.5 million, or $0.26 a share. The NYSE’s revenue rose 7.3% to $287.5 million, while Archipelago’s fell 9% to $133.7 million.