Electronic stock exchange Archipelago Holdings (NYSE:AX) announced second-quarter results after the market's close Monday, and many investors would probably like to exchange them for last year's numbers.

Earnings dropped sharply from last year's second quarter -- by more than analysts expected, in fact -- and sales also declined, albeit modestly. The profit slump can in large part be attributed to higher marketing expenses linked to Archipelago's attempt to generate buzz around its pending acquisition by the New York Stock Exchange.

Archipelago said trading volume fell by 6.2% vs. the first quarter of 2005. This comes as the company's share of the market for trading Nasdaq-listed stocks continues to slump, falling to 23.1%, down from 23.5% in the first quarter and from 25.5% in last year's second quarter. Although this was offset by its rapidly increasing share of NYSE and AMEX trading, it is clear that competition is alive and well among electronic markets.

There's no hiding the fact that this hasn't been a bang-up quarter for electronic exchanges. Archipelago actually fared better than rival Instinet (NASDAQ:INGP), which last week announced its own profit shortfall, including a steeper decline in sales. The Nasdaq Stock Market (NASDAQ:NDAQ) is in the midst of buying Instinet.

What's ahead?
For investors, it is clear that Archipelago is generating excitement not because of what it's doing but because of what it's going to do. With its acquisition of the Pacific Exchange expected to close in the third quarter, Archipelago's ArcaEx will gain access to a new world of options trading. When the NYSE deal closes -- now expected in the first quarter of 2006 -- the newly formed NYSE Group will offer a "hybrid" trading platform. Companies that don't meet the NYSE's standard listing requirements can list on the electronic ArcaEx platform as an alternative to trading on Nasdaq, which is also an electronic market. And the company is already getting listings of 20 new iShares from Barclays (NYSE:BCS) Global Investors, expanding its reach in popular exchange-traded funds (ETFs).

Archipelago is the first "bagger" in our 10-month-old Motley Fool Rule Breakers service (as I write this, it is up nearly 100% since a February 2005 recommendation). Fool co-founder and Rule Breakers advisor David Gardner recommended it because he believed the company was "revolutionizing the way securities are being traded." That opinion has proved itself in the NYSE deal.

Will the NYSE Group continue to surprise the markets and meet our ultimate growth mandate, or have expectations come to match, or even exceed, the potential of the combined entity?

A recent filing with the SEC (you can read the entire thrilling 844-page document here) certainly indicates that the firms advising Archipelago and the NYSE on the deal don't value the merged company as highly as Wall Street does right now. Lazard (NYSE:LAZ), acting as financial advisor to the NYSE, figured the combined company was worth $3.5 billion to $4.1 billion. If we take the midpoint of that range, $3.8 billion, and split it 30-70 between Archipelago and the NYSE, that values Archipelago at $1.14 billion, or $24 per share. Archipelago's advisor, Greenhill, pegs the firm's per-share value at $18.75 to $32. Archipelago trades for about $40.50.

When asked about the large discrepancy between these valuations and Archipelago's current stock price, CEO Jerry Putnam said this week that it was because "NYSE Group should be in a position to do things that maybe all our competitors are not in a position to do." He also postulated that investors may think the combined company can cut costs and grow at a rate higher than the companies themselves have predicted.

So is the high premium on Archipelago's shares a worthy reflection of how it will transform the old-school NYSE? Or is it a stock run past what even management can justify? Join us at Rule Breakers for a no-obligation free 30-day trial, where we'll knock around this and other questions on our message boards as we seek to maximize our members' profits. Click here for more details.

Karl Thiel does not have a financial position in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.