Merger of stock markets called doable if difficult

Despite denials, problems persist at NYSE, Nasdaq

December 25, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

Stock prices are soaring and generous year-end bonuses are putting a rosy glow on the cheeks of Wall Street traders, but behind all of the good cheer, America's securities markets are in crisis.

Nasdaq, which framed itself in the 1990s as the high-tech market of the future, is in decline, while the New York Stock Exchange, the granddaddy of them all, is being forced to deal with mounting demands for reform of a system designed to reward good-old-boy trading specialists more than investors.

The problems of both markets came into focus this week with a widely echoed report that Nasdaq and the NYSE had begun discussions of a possible merger.

The reports were quickly shot down by officials of both exchanges, but the problems that prompted the stories remain and steps aimed at finding the right answers appear likely to fundamentally reshape the nation's market system. Industry experts say the possibility of a merger should not be dismissed, despite the denials.

"It is a long shot, but it is not impossible," said John R. Boo, director of Nasdaq trading at Ferris, Baker Watts Inc. in Baltimore. "I'd bet they have at least had a conversation. Both markets are trying to resolve a really difficult set of problems right now."

"Anything is possible," said William R. Rothe, former managing director of Deutsche Bank Alex. Brown in Baltimore and a former member of the board of governors of the National Association of Securities Dealers, Nasdaq's former owner. "It is certainly possible that something like that might be considered."

Joseph R. Hardiman, president and chief executive of the NASD and the Nasdaq stock market from 1987 to 1997, and a private equity investor in Baltimore, said the idea of combining the two exchanges has come up before.

"These conversations have been held off and on over a number of years," Hardiman said. "They have really not gotten much beyond ... conceptual stages for a number of reasons."

Hardiman said he and Richard A. Grasso, the former chief of the NYSE, had "lighthearted" discussions, or they might joke about merging the markets.

"We never had any serious conversations with the New York Stock Exchange about a merger," Hardiman said. "I think it is doable, but it is not easy to do. It is very difficult to accomplish a merger of markets which have different ownership structures and different operating structures."

A combination of the two would create a powerful force, experts said.

Nasdaq could benefit from the NYSE's strong reputation, a larger marketplace and the specialist system, which creates more orderly and stable markets, experts said. The NYSE could benefit from Nasdaq's superior technology and add more big-name companies, such as Microsoft Corp. and Intel Corp., which it has tried to lure away for years, experts said.

"There is some real potential here for innovation," said William Christie, a professor of finance at Vanderbilt University.

A merger would likely mean significant savings on redundant operations, Hardiman said.

"The dollars that are spent on technology alone by both markets are huge, that would have economies of scale," he said. "Just in the administration you could see some economies of scale. They both have very large marketing departments. The role of the exchange floor over time would diminish; that could present some significant opportunities for savings."

The NYSE clearly needs administrative reform, almost everyone involved agrees.

The exchange has come under fire for conflicts of interest between its regulatory and business units. In September, its longtime chairman, Grasso, resigned amid outrage over his $188 million compensation pack- age. The Securities and Exchange Commission recently began an investigation into improper trading among NYSE specialists, who are in charge of keeping orderly markets.

This month, the California Public Employees Retirement System, the giant pension fund, filed a lawsuit contending that it lost millions of dollars over the years because of fraudulent practices at the NYSE and seven specialist firms.

Meanwhile, the Nasdaq, which was the hottest market in the 1990s, has been struggling in the wake of the Internet stock bust in 2000. It has been losing market share to smaller competitors, experts said. Revenue fell 25 percent for the nine months ending Sept. 30, to $462 million as the company restructured. It also lost $84.5 million for the period, compared with a profit of $42.8 million a year earlier.

Nasdaq has also struggled with its acquisition in 1998 of the American Stock Exchange, which it agreed to sell in June, but that deal reportedly fell through.

"Nasdaq has some major market share issues," Boo said. "A lot of things that were working well for Nasdaq in the '90s just aren't in place anymore."

Boo said Robert Greifeld, Nasdaq's president and chief executive, must reinvent the company. "He has got to really reconfigure it," Boo said.

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