Haggling Slows the Merger of 2 Exchanges

Merger negotiations between the Pacific Exchange and the Chicago Board Options Exchange are taking longer than expected as both sides continue to wrangle over key issues, including a new trading facility in San Francisco, sources close to the negotiations said.

The merger agreement, announced by the boards of governors of the exchanges on July 23, was expected to be ratified by the members of both exchanges “this fall,” creating one market to handle the bulk of the nation’s stock options trading.

Once details are worked out by the negotiating teams, the merger plan still needs the approval of a two-thirds majority of the Pacific Exchange’s 552 members and a simple majority of CBOE’s more than 1,300 voting members.

“We’ve made a fair amount of progress, and frankly I don’t think it’s surprising that it’s taking as long as it is,” said Pacific spokesman Dale Carlson.

“We are still very optimistic, and we still hope to put something before our members for a vote this fall,” he said.

Specific sticking points, said those close to the negotiations, include how to determine lucrative option-contract allocations between members of each exchange; which side picks up the tab for combining the two exchanges’ technology systems; and whether to build a new building in San Francisco.

The Pacific has plans to construct a large new facility in downtown San Francisco to house the exchange’s main options business. The firm’s Los Angeles trading floor, which exclusively trades individual stocks and which employs a staff of about 100, plus 50 trading specialists, is expected to be spun off or closed as the merged exchange focuses on options alone.

Sources said the Chicago members are concerned about the wisdom--and cost--of a new San Francisco facility. Others said the Chicago negotiators are nervous about earthquakes, but sources at the CBOE who requested anonymity disagreed, saying there isn’t an earthquake issue and that the conflict is more about cost.

“The Chicago guys, to their credit, are tough negotiators. They’ve been unyielding,” said one West Coast source close to the merger negotiations. “But they’ve been at the table too long.”

“We said fall or end of December,” said Carol Kennedy, spokeswoman for the CBOE. “So we’re still in the ballpark. If we get to the first of the year and there’s not any news, then we might have to address that we’re extending the deadline.”

For his part, Carlson said of the negotiations: “Is allocation an issue? Yes. Is who pays for what an issue? Yes. But there’s nothing there that can’t be resolved.”

Meanwhile, the future of a new stock-trading system devised by OptiMark Technologies in partnership with the Pacific got a boost this week when a top executive of American Express agreed to join the firm as chief executive.

Phillip J. Riese, president of the consumer card services group of AmEx, takes over as CEO Monday in OptiMark’s New York office. He succeeds company co-founder Bill Lupien, who will remain chairman.

The OptiMark system, which has cost tens of millions of dollars to develop, is designed to allow big investors to trade directly and anonymously with one another.

OptiMark recently reached agreements to provide its trading system to the Nasdaq Stock Market and the Osaka Securities Exchange.

The Pacific, although expected to get out of the stock-trading business with the CBOE merger, still is supposed to launch the OptiMark system.