Under the agreement, the Nyse's 1,366 members will swap their seats for a 70% stake in the merged entity and a $400 million cash payment. Shareholders of Chicago-based Archipelago will get the remaining 30%.

Shares in Archipelago soared by $8.94 to $27.70 in early trading as the markets digested the figures, and implications of the deal.

The transaction will usher in a new era of electronic trading at the Nyse, which has responded to regulatory pressures and fierce competition by advancing plans for hybrid trading, combining fast screen-based dealing systems with traditional floor-based market-making.

News of the merger comes ahead of an expected $1.8 billion acquisition of ArcaEx competitor Instinet by rival New York market Nasdaq.

John Thain, CEO of the Nyse, says: "As we look to the future and to the challenge of competing globally in a high-speed electronically connected world, it is clear that we must do more. This transaction will mean we will be more diversified and transparent, and better able to compete, grow and serve our customers."

Archipelago not only provides the Nyse with a ready-made electronic trading system it also offers a platform for extended trading hours, new asset classes such as derivatives, and competition for Nasdaq listings. Archipelago has a 25% share of trading in Nasdaq stocks, but takes less than three per cent of Nyse-listed business.

Nyse's Thain will be CEO of the merged group while Archipleago chief Jerry Putnam takes a seat on the board. The transaction is subject to approval by Nyse members and regulators and is set for completion in Q4 2005 or early 2006.