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Tuesday May 4, 4:47 am Eastern Time
Philadelphia Stock Exchange flirts with NYSE
By Jennifer Westhoven
PHILADELPHIA, May 4 (Reuters) - The Philadelphia Stock Exchange has approached the
New York Stock Exchange about a combination with the world's largest stock exchange,
sources close to the talks said on Monday.
The overture to the NYSE comes as the PhilEx, founded in 1790 and the nation's oldest exchange, finds itself struggling to
survive in a swiftly consolidating and increasingly electronic industry.
The move comes just weeks after the plug was pulled on its planned merger into the National Association of Securities Dealers.
The NASD is the parent of the Nasdaq and the American Stock Exchange, the nation's second- and third-largest stock
markets.
''Philadelphia has definitely been mulling a deal with New York and talked to them, '' a source near the situation said. ''The
ball's in New York's court now.''
The PhilEx and the NYSE declined to comment on any merger possibilities between the two exchanges.
Whether or not the NYSE would be interested in a deal is unclear. But the possible deal is intriguing Wall Street and the City of
Brotherly Love for several reasons.
The Philadelphia exchange's best feature is its options business, the fourth-largest in the U.S. and, it says, the fastest growing.
Options volume has grown at about 40 percent annually since 1995, double the industry rate of 20 percent.
One of the reason for earlier Nasdaq-Amex interest was the PhilEx's strength in developing options on baskets of stocks, like
its well-known ''SOXX'' Semiconductor Index.
Nasdaq-Amex officials have said the deal broke up because it was no longer ''economically feasible.'' Few other details have
officially emerged.
But an options business might not be a suitable lure for the NYSE. It exited the options business in 1997, selling it to the
Chicago Board Options Exchange.
Big Board Chairman Richard Grasso has said in the past his exchange is not interested in being Number Two in any field, let
alone fourth. A federal probe into the options business could also prove a deterrent.
In terms of stock trading, PhilEx sees only a trickle. Its daily share trading volume of six million to seven million shares barely
registers compared to the NYSE, where trading is around 850 million shares daily.
But large Wall Street firms, who pay to keep up expensive trading floors would likely back any idea that offers the chance to
eventually close the Philly floor. Trading floors worldwide have given way to cost-effective screen-based systems. The latest
casualty was the Tokyo Stock Exchange, where the bell closed the final session of floor trading on Friday.
The threat of a new electronic options exchange in the U.S. next year has already prompted a round of fee-cutting by U.S.
options exchanges.
But the Philadelphia could offer the NYSE something more constructive -- a back door into trading Nasdaq stocks and
experimenting with electronic trading, another source said.
The Big Board has said it is talking to several alternative trading systems (ATS) about trading stocks not listed on the NYSE --
a radical departure.
Currently, Nasdaq and regional exchanges poach NYSE volume by trading NYSE stocks through ''unlisted trading privileges.''
The NYSE, which gets a substantial amount of its revenues from listing fees, has never traded stocks it did not list -- until now.
It is likely the NYSE would not trade such stocks in its open outcry format, but on some kind of electronic network.
The PhilEx is implementing a new trading system this summer, which it hopes will triple its stock volume. The system matches
orders before the opening bell and spits them out after the close, giving trades a volume weighted average price (VWAP) for
the session. Ashton Technology Group Inc.(ASTN - news), the developer, say it allows institutional investors the chance to buy
and sell without the sheer weight of their orders moving prices. Users can avoid daily market volatility while maintaining their
anonymity.
Fred Weingard, Ashton chief technology officer, said the system should be implemented in July and its target is to add 20
million to 30 million shares to daily volume.
''We were always looking for strategic alliances to enhance our market place, but we're confident we have the technology and
liquidity to remain independent,'' Chairman and Chief Executive Meyer ''Sandy'' Frucher told Reuters through a spokeswoman.
More Quotes and News:
Ashton Technology Group Inc (Nasdaq:ASTN - news)
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