NASD Agrees to Spin Off Nasdaq; Also Plans Trade of NYSE Stocks
The board of the National Assn. of Securities Dealers tentatively agreed Thursday to turn the Nasdaq Stock Market into a for-profit company, a move that underscores how technology and rising competition are forcing sweeping changes in stock markets around the globe.
The plan, which is expected to be finalized next month, calls for majority ownership of Nasdaq to be spun off in two private placements to a combination of Wall Street firms, Nasdaq-listed companies and institutional investors. The NASD is a not-for-profit membership organization whose 5,500 members own Nasdaq.
An initial public offering in which shares are sold to the general public may occur eventually, but there are no such immediate plans.
Separately, Nasdaq also signed an agreement with a private company that will let Nasdaq offer electronic trading of New York Stock Exchange-listed stocks by the middle of next year.
In the past, the NYSE and Nasdaq have generally refrained from doing business in each other’s stocks. The NASD’s deal with Primex Trading, along with the spinoff vote, demonstrates the free-for-all that has broken out among established markets as new electronic trading systems intrude on long-protected franchises.
These steps, as well as similar moves toward privatization at smaller exchanges, illustrate how traditional stock-trading--which is dominated by large Wall Street firms and often carries high costs--is adjusting to innovation and new, intense competition. The most efficient and lowest-cost trading systems stand to gain market share not only in the U.S., but also increasingly in foreign markets as those are opened up to competition.
“What is sweeping over Wall Street these days is the technological equivalent of a tsunami,” said Junius Peake, a finance professor at the University of Northern Colorado.
The NYSE is also likely to convert to being a for-profit company next year. Switching from membership organizations controlled by Wall Street firms would allow the NYSE and Nasdaq to raise money to fend off rivals, and would free them of some of the bureaucracy and conflicting interests that now hinder their operations.
Nasdaq generates revenue by charging trading fees and by selling stock-quote data. That revenue now funds Nasdaq’s regulatory unit, which oversees the securities industry and trading on the Nasdaq market. One issue in the spinoff plan is how the regulatory unit will be funded going forward.
The moves to become for-profit companies has been caused by the need to raise capital to compete with emerging trading systems known as electronic communications networks, or ECNs, that have grabbed about one-third of Nasdaq trading volume and a small but growing share of NYSE volume. ECNs have come about as a result of advancing technology and regulatory reforms.
The Wall Street upheaval is considered positive for individual investors because it promises to lower their cost of trading stocks while giving them more control over the process.
Investors would “like to send their orders to one place and have them executed inexpensively and anonymously,” Peake said.
Under the spinoff plan, the NASD would sell as much as 49% of Nasdaq in a private placement as early as March. By midyear, a second deal would cut NASD’s ownership of Nasdaq to about 25%.
The spinoff hit a roadblock in the past two weeks when small brokerage houses, which make up the bulk of NASD’s 5,500 members, objected to a plan for the first sale to occur without first being subjected to a membership vote. The plan called for members to vote only on the second sale.
Frank Zarb, NASD chairman and chief executive, said Thursday that a final decision on the issue had not been made. But board member Alan Davidson, head of a small brokerage in Jericho, N.Y., said he is now comfortable with the plan based on conversations with Zarb.
“I am satisfied that those issues will now be dealt with and that there will be a fair resolution,” Davidson said.
The deal with Primex calls for the establishment by July of an electronic “auction” market that would handle both Nasdaq and NYSE stocks. In theory, the system would give investors the chance for “price improvement” of their orders. When investors try to buy or sell shares, big firms could execute those orders at better prices than previously available. The auction format is a hallmark of the NYSE.
Participation in the new system would be voluntary, and it’s unclear exactly how it would be meshed with Nasdaq’s traditional “dealer” market. Primex is owned by five major Wall Street firms: Bernard L. Madoff Investment Securities, Merrill Lynch & Co., Goldman Sachs Group, Citigroup’s Salomon Smith Barney and Morgan Stanley Dean Witter.
The plan to launch trading of NYSE stocks follows last week’s vote by the NYSE board to scrap its controversial Rule 390 that had limited trading of some NYSE stocks on electronic markets such as ECNs.
Critics had lambasted the rule as the NYSE’s attempt to preserve the role of its human “specialists” in an era of automated trading. “The notion of a New York Stock Exchange is becoming obsolete,” one Nasdaq board member said Thursday.
In response to the NASD plan, the NYSE is likely to come up with a system to begin trading Nasdaq stocks. Indeed, Primex had discussions with the NYSE about a potential linkup before signing the NASD deal, said Bernard Madoff, head of his eponymous firm.
NYSE officials could not be reached for comment.
