Nasdaq and the Amex Appear To Be Heading for a Breakup
By KATE KELLY
Staff Reporter of THE WALL STREET JOURNAL
The American Stock Exchange and the parent of the Nasdaq Stock Market, just 2 1/2 years into their once-promising marriage, appear headed for a breakup.
Faced with a November 1998 merger that hasn't delivered on most of the expected advantages in competition with the New York Stock Exchange, the National Association of Securities Dealers, currently parent to both the Amex and Nasdaq, quietly is "shopping" the Amex to competing exchanges, people familiar with the matter say.
The Amex, by far the smallest and least profitable of the three major U.S. stock exchanges is trying, in turn, to forge new relationships of its own. The Amex's direct management, led by its chairman, Sal Sodano, has been exploring the landscape for alliances and joint ventures that could help it survive apart from the NASD.
Early this year, according to people close to the situation, the Amex's management and stock-trading system, Instinet Group LLC, a unit of Reuters Group, had formal talks on a partnership. Mr. Sodano has also met with Jerry Putnam, chief executive of an Instinet competitor, Archipelago LLC, another electronic-trading system, about a possible partnership; those talks don't appear to be leading to an imminent deal.
Neither Mr. Sodano nor Instinet would comment specifically on those discussions, while Archipelago confirms there were informal talks on its end.
Robert Glauber, chief executive officer of the NASD, in an interview characterized his approach as seeking to spin off the Amex, just as a portion of the Nasdaq has been sold off to Wall Street firms and other private investors. He won't discuss the talks with Instinet.
"Where I'd like to see the Amex is ultimately in the same posture as the Nasdaq is to us," Mr. Glauber said. "I think it should be spun off and separate." He declined to put a time frame on the separation, but said that for the rest of 2001 at least, the focus would be on the Amex's continuing "renewal." One of the people familiar with the Instinet talks said that Mr. Glauber had expressed hopes to have NASD's stake in the Amex be "zero percent by the end of 2002."
Mr. Sodano asserted that the Amex is in great shape. "Literally, just about every major exchange in the world has come to us and asked us how we can work together," he said. Current initiatives include a $25 million renovation to the exchange's headquarters and a $30 million investment to make trading operations electronic starting next year. He added that he and Nasdaq Chairman Frank Zarb have had "extensive discussions about the future of the American Stock Exchange." (Mr. Sodano, previously the chief financial officer of the NASD board, was made its vice chairman in the aftermath of the merger.)
Whatever scenario plays out, it all appears to be leading to an inauspicious finale to an alliance -- the electronic Nasdaq, founded in 1971, with the venerable but less-vibrant American exchange, founded in 1911 -- that was supposed to create a supermarket of trading and listing choices to surpass the Big Board.
"I think the cultures were very disparate to begin with," said veteran Wall Street executive Joseph Grano, who back when the Amex/Nasdaq partnership was announced had expressed optimism about it. In retrospect, said Mr. Grano, who is president of UBS AG's UBS PaineWebber securities firm, merging turned out to be "passe." He said that while there is a role for an electronic market like Nasdaq and for an exchange like the Amex, "whether or not [they] should ever be commingled is questionable."
Like the Hatfields and McCoys, the Amex/NASD merger brought together Wall Street's two warring methods for trading stocks: the "auction market" traditionally espoused by the Amex and NYSE, where buyers' and sellers' orders meet at a common point on an exchange floor, and the Nasdaq's exchange-less "dealer" market, in which multiple brokerage firms make a market in a given stock.
The Amex is a major options-trading mart and has carved out a growing niche with its "exchange traded funds," which allow investors to bet on major indexes like a basket of the 100 largest Nasdaq stocks -- and, unlike what is possible with mutual funds, to be able to do so throughout the day. Introduced in 1993, ETFs on the Amex reached $70.3 billion in invested assets in its 92 ETF products last year, nearly double the year-earlier assets.
The Amex, however, remains a minor stock exchange. It had 662 listed companies just after the merger; now it has 635, and its biggest companies in market capitalization are Nabors Industries Inc. and Devon Energy Corp. -- solid companies, to be sure, with market capitalizations of $7.89 billion and $7.45 billion, respectively, but nowhere near the prestige of the NYSE and Nasdaq lists. Stock-trading volume on the Amex remains just 33 million shares a day, which the Nasdaq or NYSE can do in less than a half-hour.
Back at the start of the deal, officials from both the Nasdaq and the Amex viewed their alliance as a chance to pose a previously unseen challenge to the Big Board. Though the Nasdaq had established itself as a pre-eminent market for most start-up companies and for giant tech stocks, its electronic system of dealers linked by computer made it unable to compete directly with the trading-floor structure of the NYSE. For the Amex, the merger was an opportunity to draw on both the prestige and the financial resources of the Nasdaq.
At the time of the merger, remembers the Amex's then-Chairman Richard Syron, the Amex "was certainly larger than a regional [exchange], but it wasn't on the same scale as either the New York or the Nasdaq. The need for more technology ... was a primary motivator."
Yet with the announcement the following summer of a likely spinoff of Nasdaq from the NASD, those "market of markets" dreams of sharing stock listings dissolved almost as quickly as they had been formulated.
According to Mr. Zarb and Mr. Glauber, who succeeded Mr. Zarb as head of the NASD in November (Mr. Zarb remains Nasdaq chairman), that development was less a reflection of a failed Nasdaq-Amex partnership than it was an acknowledgment of the need to make Nasdaq both independent from its regulator and increasingly global. Even so, an attitude persists among some Wall Street traders that in its glorified merger with the NASD, the Amex may have gotten the short end of the stick.
In fact, the failure of the merger to work as planned is a minor setback at worst for the Nasdaq, which has become the stock market of choice for high-tech companies. But it could pose greater challenges for the Amex, long known as the "Curb," because stocks were swapped on the street in its early years.
Some Nasdaq staffers were privately annoyed by the attempted synergy with a rival that, like the NYSE, has a whole different philosophy on how stocks are traded. "I think they were outraged," remembers the Amex's Mr. Syron, "and some people in the [exchange] system were outraged."
The Nasdaq's Mr. Zarb acknowledges there was some resentment. "The people that really had heartburn were the people out there competing every day," he says, "the sales guys on both sides. And they would obviously want to criticize the other guy's market model."
Soon, the two markets could be able to freely compete again. In addition to the talked-about alliance with Archipelago, the Amex's Mr. Sodano has discussed the idea of jointly trading "single-stock futures" with officials from the New York Mercantile Exchange. The New York Merc declined to comment.
"I think the true test is, are you better off now than you were two years ago?" says Mr. Syron, the former Amex chief. "And I think the answer is yes."
Write to Kate Kelly at kate.kelly@wsj.com
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