NASD Approves Plan to Change Nasdaq to Company
New York, Jan. 4 (Bloomberg) -- The National Association of
Securities Dealers' board unanimously approved a $1 billion plan
to change the Nasdaq Stock Market into a private, for-profit
company that will sell stock in itself to raise money.
``This gives Nasdaq more flexibility in a highly competitive
and fast-moving environment,' NASD Chairman Frank Zarb said at a
news conference.
Zarb said Nasdaq would be able to more easily raise money to
fund its growing technology needs, and to more swiftly make
organizational decisions.
The plan, which Zarb has said he wants to put into effect by
July, will make Nasdaq the first securities market in the U.S. to
be owned by its shareholders rather than by member brokerages.
Several other U.S. exchanges, including the largest, the New York
Stock Exchange, also are moving to become corporations to try to
meet growing competition from low-cost electronic trading
networks.
The NASD, an industry group that owns Nasdaq, the second-
largest stock market in the U.S., plans to sell its control of
the market through two private placements of stock and warrants.
The sales will be made to member brokerages, institutional
investors and 130 large listed companies such as Microsoft Corp.
and Intel Corp.
The private placements, which will be underwritten by
Citigroup Inc.'s Salomon Smith Barney Inc., will sell as much as
79 percent of the new company's stock, Zarb said. The NASD plans
to keep a minority stake in Nasdaq. The first placement, which
will be valued by J.P. Morgan & Co., will leave as much as 49
percent of the company in the new shareholders' hands, and the
second another 30 percent, he said.
Member Vote
The first step in the process calls for the NASD to submit
the plan to a vote by its 5,500 member firms, probably by March,
Zarb said. NASD board member Alan Davidson, who led a fight by
small-member firms against the original NASD plan, said he
expects the members to approve the final proposal.
The first stock sale could take place in April, and the
second by mid-year, Zarb said. Nasdaq also will apply to the
Securities and Exchange Commission to change its legal status to
an exchange, which will let it trade stocks listed on the New
York Stock Exchange.
Nasdaq's move may spur the NYSE to accelerate its own
preparations for an IPO, which chairman Richard Grasso has said
could take place by the end of 2000. Grasso, who has been
encountering resistance from some member firms, will use today's
vote as ammunition in trying to prod his constituents, a
securities-market expert said.
``Grasso will tell some of the lukewarm firms that the Big
Board can't afford to be far behind,' said William Freund, a
former NYSE chief economist, now a Pace University economics
professor.
At least three other U.S. exchanges also are moving to
become for-profit companies: the Pacific Exchange's equity unit
and the two largest futures markets, the Chicago Board of Trade
and the Chicago Mercantile Exchange. Stock exchanges in Australia
and Sweden already are for-profit companies.
Followed Review
The NASD expects to raise at least $1 billion from its
Nasdaq sale, of which about $215 million will be given to its
American Stock Exchange unit for technology development, and $500
million to NASD Regulation, Zarb said. Most of the remainder will
go to Nasdaq.
SEC Chairman Arthur Levitt has insisted that the regulatory
unit, headed by Mary L. Schapiro, maintain its vigor and
independence. He has supported efforts by Nasdaq and the NYSE to
become corporations.
Today's NASD vote capped a 15-month internal review that saw
the leadership's original plan yanked by Zarb last month in the
face of widening opposition from small member firms. The final
plan, which contains financial concessions to these brokerages,
reflects the board's pressing desire to get ready access to
funding for the market's expanding technology needs.
``It gives Nasdaq the ability to assemble the capital and
resources necessary to take on the next generation of global
transactions,' Zarb said.
Zarb noted that Nasdaq is forming electronic-
trading partnerships in Europe and Japan that will require new
trading systems to be developed. These partnerships, called
Nasdaq Europe and Nasdaq Japan, will allow cross-listing of U.S.
and foreign stocks. Nasdaq will be offering investment stakes in
these ventures to U.S. dealers, he said.
The board vote came as the Nasdaq Composite Index tumbled 5.6
percent to 3901.69, dropping 200 points for the first time in its
29-year history. In percentage terms, it was the biggest decline
since Aug. 31, 1998, when markets around the world fell after
Russia's debt default.
The NASD plan calls for Nasdaq to reduce member fees and
assessments by $114 million over seven years. Part of this
reduction will include a $600 cash rebate to each member firm
this year, Zarb said. The firms, the majority of which have fewer
than 10 brokers apiece, also will get their allotment of Nasdaq
stock increased to 33 percent if the market makes an IPO, from
the 28 percent called for in the original plan.
The remainder of Nasdaq will be divided up among market-
making firms, which are due to get 32 percent of the stock; the
NASD, which will keep 22 percent; the largest companies, which
will receive 16.5 percent, and institutional investors, which
will get 4.5 percent.
Private Placements
Nasdaq currently derives its revenue from membership,
trading and listing fees, and from sale of stock-quote data to
vendors and brokerages. It often has run into resistance in
trying to raise revenue from any of these sources.
NASD board member Frank Baxter, who headed the NASD
committee that recommended Nasdaq's conversion, said the plan
would streamline the market's decision-making, which has become
bogged down in conflict among factions with different business
interests. A Nasdaq company would increase management's authority
and give shareholders a common stake in the market's growth, said
Baxter, chairman of the Jefferies Group Inc. brokerage.
Members' Stock
Nasdaq, in trying to position itself to react nimbly to
technology needs and competition, is responding to the growing
popularity of low-cost electronic trading.
In the U.S., two private trading networks that automatically
match buyers and sellers, Datek Online Holdings Corp.'s Island
and Archipelago LLC, have applied to become stock exchanges that
will try to lure business from Nasdaq. Overseas, eight European
exchanges have announced an alliance to try to create a common
market with one electronic link and 24-hour trading by November
2000.
Zarb has responded by devising proposals aimed at giving
U.S. investors access to the best possible prices at the lowest
possible cost. He also is forming alliances with markets in
Europe, Japan and Hong Kong in an effort to offer round-the-clock
worldwide trading. |
