Stock exchanges consider merger

The National Association of Securities Dealers, which runs the second-largest U.S. stock market, is discussing a merger with the struggling American Stock Exchange, which officials said could give the NASD the cachet to challenge the New York Stock Exchange for blue-chip listings and give the Amex access to new technology that would revolutionize its trading system.

The NASD has largely eclipsed the much older Amex in recent years, but both have suffered from scandals, leaving them in a difficult struggle with the Big Board, the nation's dominant securities market. A merger is not yet certain, executives said, and any firm proposal must be approved by at least two-thirds of the members of the Amex, the NASD board and federal regulators.

If the deal is approved, the Amex would for the first time give customers a choice of two ways to execute their buy and sell orders. The customers' broker could either do an electronic trade, where an order would be filled at the current, best price as displayed on a computerized central order book. Or they could a manual trade, where a broker on the exchange floor would carry the order to the actual specialist post and haggle over price.

Currently at both the Amex and the NYSE, orders can be delivered electronically to the specialist, but a human being has to intervene to execute each one. This tradition of a human in the middle of every trade is something both the Amex and the NYSE have spent hundreds of thousands of dollars trumpeting as the best and most fair way to trade stocks.

But not anymore, at least as far as the Amex is concerned. "This will give people freedom of choice," said one source who supports the merger. He noted that several exchanges around the world use technology extensively and "a lot of people feel this is a better mousetrap."

"You either get on the train or you get run over by the train," said the source, who stressed that all orders will still go to a central specialist post on the Amex, even though a human being will no longer be involved in many of them.

Sources said the Amex hopes its trading volume will rise significantly as part of the merger.

That would generate higher revenue for the exchange, which it would share with its members under some sort of revenue-sharing agreement.

The NASD would gain access to Amex's lucrative business trading options and other so-called "derivative" securities, such as options on indexes like the Dow Jones industrial average, sources said. The NASD could also, then, offer companies the opportunity to have their shares handled by a human specialist, not a computer.

The meaning of a combination to investors is unclear, according to securities regulators and Wall Street executives.

Some say investors will gain as the NASD applies its state of the art computer technology to the Amex auction market. Computer driven orders, officials said, can be executed more efficiently than orders handled by the Amex's floor brokers.

Officials also said a merger could lower operational and regulatory costs borne by the member firms that participate in both markets, and those savings could be passed along to investors in the form of lower brokerage commissions.

Others say that it is uncertain where the cost savings are to come from because, at this point, experts expect the NASD to maintain both markets as quasi-independent entities.

In addition, some experts note, only 783 companies list their stocks on the Amex. So even if the NASD can bring trading efficiencies to the Amex, the boon for investors is likely to be relatively small.

Nor is it obvious that a merger would cause investors to obtain significantly better prices on the 5,487 Nasdaq stocks. Recent rule changes by the Securities and Exchange Commission have already improved competition among Nasdaq market makers, the competing firms that execute customer orders on computer screens. The spread between prices at which the dealers are willing to buy or sell shares on the Nasdaq has already narrowed by 20 to 30 percent since the new rules went into effect.

03-13-98