Nasdaq, Amex Close to Deal, Sources Say

The nation’s No. 2 and No. 3 stock markets on Thursday confirmed that they are holding serious merger talks in an effort to better compete with the New York Stock Exchange. People close to the discussions said a deal is very close.

Although a merger between the Nasdaq Stock Market and the American Stock Exchange could reduce trading costs for investors, experts said, the main impetus is to shore up competitive weaknesses of Nasdaq and Amex in their battle with the Big Board for more listings and volume.

“The combination is not being made for investors; it’s for business reasons,” said Richard Y. Roberts, an attorney for the Electronic Traders Assn. and former commissioner of the Securities and Exchange Commission.

On Thursday, neither the Amex nor the National Assn. of Securities Dealers, operator of Nasdaq, would detail how the proposed combination would work.

The entire financial services industry has been undergoing rapid consolidation in recent years, and analysts said it is inevitable that the nation’s markets will participate in the same cost-saving process.

With average daily stock trading of 24 million shares, Amex volume is puny compared to the 600-million-plus shares typically traded each day on the NYSE and Nasdaq.

For Nasdaq, the main attraction would be the Amex’s lucrative options-trading business, built up over the last two decades. A combination would instantly vault Nasdaq into the No. 2 position nationally--behind the Chicago Board Options Exchange--in the fast-growing business.

Details of the proposal were presented to Amex members at a meeting here on Thursday night, said people familiar with the discussions. Earlier in the day, the two markets’ boards were briefed.

“It’s tough to make it in a small place,” Amex Chairman Richard Syron told members, according to Bloomberg News. The merger “could really give us a new life, a new growing life, in the equities business.”

Amex, in a brief statement, said that a merger would “combine the best features of the Amex’s auction market and NASD’s electronic market.” The statement also cautioned that there are “many issues yet to be resolved and no assurances that the combination will be completed.”

The larger and faster-growing Nasdaq would in effect be taking over Amex, but observers said that at least initially, the two markets would operate as independent units, with their self-regulatory organizations also separate.

The goal of the talks is to reach a tentative agreement that would be presented to Amex’s 660 member brokers for a vote next month, people close to the discussions said.

The biggest opposition is expected to come from Amex floor brokers, whose jobs could be threatened by a cost-cutting switch to a more electronic market.

“The $64,000 question is what’s Nasdaq going to be able to offer these guys that they will find attractive?” said Patrick Healy, president of Issuer Network in Chevy Chase, Md., which advises firms on where to list their stock.

Nasdaq must craft its proposal to persuade Amex brokers that a merger offers them a better chance of long-term survival than continuing to compete with both Nasdaq and the NYSE, Healy said.

The deal might also help Nasdaq attract and retain listings of companies, including foreign ones, that prefer face-to-face trading on a central floor--as is done at Amex and the NYSE--instead of trading led by securities firms over an electronic network.

As of year’s end, Nasdaq listed 5,466 companies with a total market value of $1.9 trillion, while the NYSE’s 3,044 companies were valued at $11.8 trillion. The Amex’s 783 listed companies had a value of $168 billion.

* HOW INVESTORS MIGHT BENEFIT: Some experts see consolidation helping small investors. Q&A;, D5