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.

However, the National Assn. of Securities Dealers, operator of the Nasdaq Stock Market, and the American Stock Exchange on Thursday declined to detail how the proposed combination would work.

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

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

“This puts more pressure on the regional exchanges to do something,” said Bernard L. Madoff, whose New York firm of the same name trades major stocks on the NYSE and Nasdaq.

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

“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 remaining separate.

The goal of the talks is to reach a tentative agreement that would be presented to Amex’s 660 members 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 companies 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.

For Nasdaq, the main attraction of the deal is the lucrative options-trading business that Amex has built up in recent years. A combination would instantly vault Nasdaq into the No. 2 position nationally--behind the Chicago Board Options Exchange--in the fast-growing business.

The deal might also help Nasdaq attract and retain listings of companies 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.

Nasdaq, founded 27 years ago, has been a leader in technological innovation in the markets, and is the trading home of many of America’s fastest-growing and most glamorous stocks, including Microsoft Corp., Intel Corp. and MCI Communications Corp.

But Nasdaq also has seen many of its home-grown stars defect to the Big Board, including America Online Inc., Jefferies Group Inc., Bay Networks Inc. and Iomega Corp.

For the 87-year-old Amex, which has steadily lost market share to both Nasdaq and the NYSE, the merger could be a question of survival. Amex recently held merger talks with the Philadelphia Stock Exchange.

* WHAT WOULD BE DIFFERENT?: Some experts predict a boon for small investors, but others disagree. D5