Before you get caught up in the hype and go out and buy shares in NYSE Group (NYX), I urge you to do some basic valuation work. Shares of NYX, the newly formed public combination of Archipelago and the New York Stock Exchange, opened at $67 per share yesterday and proceeded to close at $80. Today the stock is up another $6 at the open. Current market value at $86 per share: $13.6 billion, based on 158 million shares outstanding.

The reason for the rise has more to do with limited supply than anything else. Retail investor interest has been strong so far, and there simply aren't many shares available to buy. Much of the stock is being held by NYSE seat owners and member firms, who can't sell it right now. A supply-demand imbalance is causing a short term spike, but a closer look at the company's valuation makes it clear that anyone paying $86 is playing with fire.

Keep in mind that Archipelago (AX) stock traded at $17 before the merger with the NYSE was announced last year. The combination has resulted in a 400% increase in the value of that equity (AX shares became NYX shares beginning yesterday). I don't doubt the deal will be accretive, but isn't 400% a bit extreme?

AX was expected to earn $1.11 per share in 2006 before the deal closed. Even if that number winds up being $1.50 after the merger (a VERY optimistic projection), the current forward P/E of NYSE Group is 57 times. Buyer beware.