Nasdaq Chief on the NASD-Amex Merger and the Hot IPO Market
Alfred R. Berkeley III, who took over as president of the Nasdaq Stock Market in June 1996, has led the nation’s second-largest market through a major transition period, overseeing extensive changes in trading rules designed to make Nasdaq fairer for investors. More changes are coming: On Thursday the American Stock Exchange’s membership voted to approve a merger with the National Assn. of Securities Dealers, the Nasdaq market’s parent. Berkeley, who was in Los Angeles this week for a UCLA conference on initial public stock offerings (IPOs), was interviewed by Times staff writer Debora Vrana.
Q: What’s your view of the current climate for IPOs?
A: The IPO market is very strong right now, so much so that it scares us. We believe there are a lot of companies going public that shouldn’t be public. Equity is risk money. There is a substantial difference between very knowledgeable private equity investors who know the risk they are taking and public investors without that knowledge. We don’t like this mismatch. People get burned, and then the entrepreneurs are limited when they go back to the market.
Q: What types of offerings bother you most?
A: The one I have a problem with is the IPO that comes to market at $2.50 a share plus warrants and goes to $8 [in initial trading], then drops to 1/16 and stays there. That’s not a real company. That’s the public getting fleeced. . . . I’m putting on Nasdaq.com [the Nasdaq World Wide Web site, at https://www.nasdaq.com] the history of every broker-dealer and their IPO performance by stock. What we’ve done is take every underwriter and every deal and you can plot what we call an EKG, which is just the stock price. If it is a flat line and a broker-dealer has a lot of these flat-line stocks, well, buyer beware.
Q: Despite strong earnings growth at many smaller companies, those stocks overall have been hammered since April. Some Wall Streeters say investors are shying away from smaller stocks because of liquidity concerns, made worse by Nasdaq trading-rule changes that have caused some dealers to limit their market-making activities. A: I don’t think it is liquidity. I think it has to do with the fundamentals of these businesses and different investment models. Very few people feel they have a good understanding of the fundamentals of small companies. So more people just want the certainty, the comfort, that comes with a large company.
Q: What’s in the NASD-Amex merger for investors?
A: We believe it will improve America’s equity markets in several distinct ways. First, we are very interested in getting the options markets under a single umbrella. We’d like to have the information about options and the information about the underlying equities on the same screen to make the execution of transactions very easy. We also would like to modernize [Amex’s] traditional equity market by putting it into an electronic register, or book, as we call it, and have the world see that. That will eliminate the need for some of the traditional labor-intensive carrying messages across the floor on a traditional physical exchange and will lower the costs for investors. We would also like to use the Amex as a platform on which to build additional business, like the Philadelphia Stock Exchange [which also plans to merge with NASD]. It’s time for some consolidation in these regional markets. We’re [the equity markets] the last part of the financial services industry to change. Virtually every other part has gone through some cataclysmic change in the past 15 years.
Q: Would you be interested in merging with the Pacific Exchange?
A: Well, I’ve met the people from the Pacific, and I really admire what they’ve accomplished. We’d love to find ways of adding them to our system electronically. It’s just not on our platter right now.
Q: The Pacific helped develop a new computerized trading system called OptiMark, which will allow investors to trade among themselves. What do you think of it?
A: OptiMark is something we should have developed at Nasdaq, but we didn’t. It may be that it’s not going to work, but I would give it a 50-50 chance that it will be very successful. We are negotiating with them right now.
Q: Aren’t some of your member broker-dealers up in arms about OptiMark because of concerns that it, and Nasdaq, will become competitors for them?
A. Absolutely. But our view is that these technologies are changing the cost of doing the business of markets, and we think they will happen either inside the Nasdaq or outside the Nasdaq. And we think our dealers are smarter to wrestle with these changes inside the Nasdaq, where they have some influence over it and are participating in it and they aren’t sticking their heads in the sand and saying there’s nothing changing out there.
