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To: TFF who wrote (10858)	6/16/2003 12:58:44 PM
From: TFF	Respond to of 12617

Pacific Exchange says Philly market seeks merger Thu June 12, 2003 05:05 PM ET (Recasts, adds details) By Doris Frankel CHICAGO, June 12 (Reuters) - The Pacific Exchange said on Thursday the Philadelphia Stock Exchange has asked it to discuss a possible merger in a sign of how electronic trading and a recent stock market downturn have forced exchanges to look at consolidation. The PSE, the fourth largest equity options exchange, declined to comment. Both regional exchanges have seen their market shares in equity options suffer during the bear market and are confronted by heightened competition such as that posed by the all-electronic International Securities Exchange. The San Francisco-based Pacific Exchange, the fifth-largest options equity exchange, said PSE Chairman Meyer "Sandy" Frucher sent a letter to Pacific Exchange Chairman Philip DeFeo and his board asking them to consider merger talks. "The Philadelphia Stock Exchange sent a letter to the Pacific Exchange on Monday inviting us to open negotiations to the acquisition of our current options operations," said Dale Carlson, vice president of corporate affairs at the Pacific Exchange. He did not provide any further details. The move comes at a time when traders are suffering from a tough market for equities options -- contracts that give the buyer the right to buy or sell a stock at a preset price within a certain time frame. Floor traders at the traditional exchanges are grappling with eroding profit margins from the stiff competition for order flow and from the decimalization of stock and options prices, which has narrowed bid and ask prices. FEELING HEAT The floor-driven options business has also been feeling the heat of electronic trade and rapid growth of the New York-based ISE which has reshaped the U.S. stock options landscape since it was formed three years ago. Just weeks ago, the Chicago Board Options Exchange tried to buy the American Stock Exchange, the third-largest U.S. stock and equity options exchange. In a letter last month, the CBOE proposed "a strategic combination" with Amex. This pooling of forces could theoretically win back market share from the ISE, the current leader in equity options volume. But the proposal from CBOE, the world's largest options exchange, came too late in the game. NASD, parent of the American Stock Exchange and the Nasdaq Stock Market, said early this month it had agreed to sell Amex to the Chicago-based private equity firm GTCR Golder Rauner LLC for roughly $110 million. The four U.S. equity options exchanges that run traditional open-outcry markets, revolving around a trading floor, have lost market share over the past few years to the ISE. In February, the ISE overtook the 30-year-old CBOE to become the industry's largest equities options exchange. Amex moved to third from second place in equity options volume. Philadelphia ranks No. 4 , with the Pacific Exchange last, according to Options Clearing Corp. data. The CBOE is still the largest options exchange if index options trading is counted. Over the past year, the Pacific Exchange migrated its equity trading business to the all-electronic Archipelago Exchange, which it operates as a regulated facility. For equity options, though, the Pacific Exchange has a trading floor which averages 320,000 contracts a day. Average daily equity option volume last month on the PSE was 408,074 contracts. On the PSE, total options volume last month was 8.6 million contracts compared with 6.9 million on the Pacific Exchange. The Pacific Exchange has concentrated on creating a new trading system. In May, it won approval from the Securities and Exchange Commission for its new electronic trading system, dubbed PCX Plus. The screen-based platform will let members make markets from the exchange floor or remote locations, which the exchange hopes will boost liquidity. PCX Plus is set to launch in October this year.