May 18, 1998
Merging the exchanges
Uncertainty reigns for contemplated combination of NASDAQ, Amex
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Robert Mullins
Milwaukee-area investment experts say the pending merger of the NASDAQ and American stock exchanges will offer public companies a choice of two distinct markets within one organization where they can list their stocks.
"This whole story here is basically one of bragging rights," said Richard Glaisner, president of the Ziegler Investment Division of B.C. Ziegler & Co., West Bend.
"It's really a marketing tool (for the exchanges) where companies listed on the American or trading on NASDAQ now could go to the merged company and have the ability to pick and choose which way they want to trade their stock," Glaisner said.
But Amex and NASDAQ aren't merged yet. On April 9, the National Association of Securities Dealers Automated Quotations system and the American Stock Exchange jointly announced a definitive agreement to merge. But details of the merger are still being worked out and a final agreement won't be completed until May 28.
Until then, local brokers and other investment sources are left to speculate on how the merged exchanges will work.
Combining two systems
"I've asked that same question: How in the world do you combine two trading systems and come up with something that makes everybody happy?" asked David Andera, vice president of marketing at Capital Investment Services of America Inc., a Milwaukee investment advisory company.
Right now, each exchange has a unique way of operating.
The Amex is an auction market, in which brokers facilitate stock trades between two investors. The NASDAQ is a dealer market, in which a dealer buys a stock then turns around and sells it. The NASDAQ dealer is commonly called a "market maker" because he or she tries to generate interest in a particular stock. The more traders who are interested in a NASDAQ stock, the bigger its market.
While initial speculation about the merger was that the two exchanges would be combined into one, it looks like each will retain its distinct dynamics.
Under the terms of the tentative agreement, Amex will continue to operate as a wholly-owned subsidiary of the National Association of Securities Dealers Inc., NASDAQ and Amex officials stated in a joint news release.
Amex would still operate as an auction market but with a few improvements. It would develop a new electronic limit order book in which investors and other market professionals can find buy or sell orders. A limit order is a pre-made plan to buy or sell a company's stock when it reaches a certain price point. As part of the deal, NASDAQ will invest $110 million in new technology to make electronic trading of Amex stocks possible.
sticking with dealers
NASDAQ will continue to operate as a dealer market.
Given the different market cultures, it may make sense to keep them separate, said Barry Berman, senior vice president of equity trading at Robert W. Baird & Co. Inc., Milwaukee.
In the NASDAQ dealer market, many traders are buying and selling a company's stock, Berman said. Depending on the popularity of a stock, there could be 30 market makers trading it or just three. The more market makers, the more competition and the smaller the spread between the buying and selling prices, Berman said.
"If there is more order flow , more liquidity, the spread narrows," he said. "If we're a market maker on a stock and there are 29 other market makers, it's much more difficult to decide what to do."
But on the Amex, one broker fills all orders for a particular stock they follow, said J. Ferguson Locke, managing director at Cleary, Gull, Reiland & McDevitt Inc., a Milwaukee brokerage.
Amex brokers are called "specialists" because they specialize in knowledge of specific companies whose stock they trade.
"The two systems are so incompatible, if you look at them, you wonder what is really happening (with a merger)," Locke said.
Cautionary note
He urges caution in tinkering with the NASDAQ, an exchange established in the 1970s for trading in companies with smaller levels of capitalization than other public companies -- so-called "small cap" stocks.
"NASDAQ is a huge force and to goof around with it (is dangerous)," Locke said. "It has done wonders for small cap stocks over the years and I think you have to go slowly or you could really screw things up."
NASDAQ is clearly the acquirer in this because it has been growing while Amex has been "struggling," said John Nofsinger, an assistant professor of finance at Marquette University, Milwaukee.
Typically, a new company lists on NASDAQ until it is large enough to graduate to the Amex and, perhaps from there, to the NYSE, Nofsinger said. But lately, companies have been moving past Amex to New York or staying in NASDAQ.
Computer chip maker Intel Corp. and software giant Microsoft Corp. are the most famous examples of NASDAQ-listed stocks that remain on NASDAQ long after outgrowing their small cap status.
"Now a lot of companies start on NASDAQ and stay there because they don't feel the need to pay the higher fees to trade on Amex or New York," Nofsinger said.
Thin trading
Amex also operates in the shadow of both the New York and NASDAQ exchanges with lower trading volume. On one recent day, 34 million shares were traded on Amex vs. 767 million on NASDAQ and 685 million on NYSE.
However, Amex does bring to the deal with NASDAQ a strong market in options trading that NASDAQ lacks. Options are rights that an investor has to acquire a stock within a certain time period when, to them, the price is right.
Providing stocks and options in a choice of markets is what will make this merger work, said Baird's Berman.
"There may be synergies down the road relating to trading stocks and options on the same stocks and having some central place that you can get to do those things," Berman said. "I just have to wait and see what sort of an arrangement they expect to have between the two."
c 1998, The Business Journal |
