NASD, Amex boards agree to merger Exchanges seek to compete better with NYSE; Creating 'market of choice'; NASD would control growing options, derivatives trade


The National Association of Securities Dealers and the American Stock Exchange have agreed to merge in a deal intended to improve their competitiveness against the huge New York Stock Exchange, according to regulators familiar with the accord.

The boards of Amex and NASD met yesterday to discuss the agreement, which they hope to announce Monday. The merger of Amex and NASD's electronic Nasdaq market would give NASD control over a growing trade in options and derivatives that has long buoyed the smaller Amex. Amex would get tens of millions of dollars from NASD for its trading computers.

A merger "would clearly give investors a market of choice," said NASD Chairman Frank Zarb, who declined to comment on the accord's details.

With a market capitalization of $11.2 trillion, the NYSE is much bigger than Nasdaq, with a capitalization of $1.8 trillion and Amex, with $162 million.

NYSE, or the Big Board, is home to the world's largest companies, including General Electric Co., Coca-Cola Co. and other companies that make up the Dow Jones industrial average. With about 3,050 companies, the NYSE is an auction market where investors' brokers trade face to face. The Amex, which includes Viacom Inc. and B.A.T Industries PLC among its 783 companies, follows the same rules.

Nasdaq was home to almost 5,500 companies at the end of last year -- many of them high-tech and fast-growing. The market, which includes Microsoft Corp. and Intel Corp. -- is run by securities firms using far-flung computers.

Meg VanDeWeghe, a finance professor at the University of Maryland and a former managing director for J.P. Morgan, said the combination reflects the overlapping of traditional auction and computer-oriented dealer systems.

"This is an evolutionary change instead of a revolutionary change," she said. "You could have once said the New York Stock Exchange and the Amex were pure auction markets. But the New York Stock Exchange and regional exchanges have taken on dealer characteristics and they have used the technology that Nasdaq has used."

After the merger, trades would take place faster and fees could fall if investor orders for Amex stocks were routed through Nasdaq rather than through a floor broker, one regulator involved in the talks said. The two markets are hoping that the improvements would attract investors and corporate listings.

"In this era of consolidation, competition for new listings has been very intense," said Andrew M. Brooks, vice president and head of equity trading for T. Rowe Price.

The 27-year-old Nasdaq market was home to 5,495 companies at the end of 1997, a year in which 475 companies joined. Average daily volume on the Nasdaq was 646 million shares last year. The Amex, which added 96 listings, had about 783 companies at the end of February. It had average daily volume of about 24 million.

The NYSE, much larger than both in terms of the value of its listed companies, added 275 listings for a total of 3,056 last year. The Big Board's average daily volume was about 530 million shares.

But Nasdaq's trading has increased at twice the rate of the NYSE over the last decade. VanDeWeghe said Nasdaq has in recent years strengthened its listing requirements.

"The benefit of being on Amex has eroded It has become increasingly apparent that the two big players were NYSE and Nasdaq," she said.

Companies are attracted to the NYSE because of prestige and they like the idea of specialists handling their stock, she said. And some companies, concerned about getting a reputation as either high-tech or small, have moved from Nasdaq to the NYSE.

"America Online used to be listed on Nasdaq, but they moved to NYSE to make clear to people that they were not a technology company," she said.

Last year, JP Foodservice Inc. of Columbia moved from Nasdaq to NYSE partially to escape a market where high technology start-ups were snaring all the attention.

The NASD approached the Amex about a merger because it wanted the Amex's auction market and options business, according to a memorandum from Richard Syron, Amex chairman, to members and employees.

NASD officials "see the benefits of adding an order-driven auction market to their quote-driven dealer market, and they considered the Amex to be the best possible partner," Syron wrote, according to a recipient of the memo.

"Nasdaq has stolen a march on the NYSE," said John Coffee, an expert on securities law at Columbia University. "The New York Stock Exchange just missed the biggest and best acquisition in terms of getting a strong options business."

The biggest potential obstacle to an agreement could be Amex's floor brokers, who deliver investor orders to the specialists who execute trades, the regulators said.

"There's no question that a merger would pose an immediate threat to floor brokers, and who's going to want to vote themselves out of business?" Michael Schwartz, chief options strategist for CIBC Oppenheimer Corp. in New York.

One of the regulators said the NASD would consider paying a modest sum to Amex seat holders. The last Amex seat sold went for a record $480,000, on Feb. 13.

Still the combination took the industry by surprise. "I didn't think it was possible," said Brooks, of T. Rowe Price. "The word for years was that the American and Philadelphia exchanges would merge."

Securities experts said the combination would benefit investors. could mean synergies and cost savings," Brooks said.

Pub Date: 3/13/98

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