AMEX-NASDAQ MARRIAGE MAY NOT LOWER TRADING COSTS — YET: INVESTMENT MANAGERS HOPE LIQUIDITY, TECHNOLOGY MAKE NEEDED STRIDES

When the Nasdaq Stock Market and American Stock Exchange say “I do,” investors will receive the wedding gift — lower trading costs.

However, investment managers caution it might take as long as two years after the marriage to realize any savings. They’re generally upbeat about the merger because there doesn’t seem to be a downside. On the upside, they see better service, faster access and increased revenue for Amex from its options business.

But many questioned in an informal survey by InvestmentNews sister publication Pensions & Investments say it is difficult to assess the potential impact because they don’t have enough information about the form the new entity will take.

Last week, the boards of Nasdaq’s parent company, the National Association of Securities Dealers, and the Amex voted unanimously for a merger. The full Amex membership will vote on the deal in May, which also must be OK’d by the Justice Department and the Securities and Exchange Commission. “The Amex will continue to operate as an auction market, but it will be an advanced auction market,” says Richard Syron, its chairman. “We’re creating a market that will have customer choice.”

Meanwhile, the merger also faces broker choice. Holders of the American exchange’s 864 seats get to vote on the deal, and the floor brokers, afraid their slice of the pie will vanish into cyberspace, are expected to be a tough sell.

“The floor brokers that own their own seats are going to be very hard to convince that this is in their best interest,” says James Angel, a professor of finance at Georgetown University.

Clearly, Amex has to address an investor perception problem, as well as liquidity issues. “The American Stock Exchange is a joke,” says Phil Schettewi, managing partner at Loomis Sayles & Co. LP in Boston. “They do little volume, and I’m not sure that many money managers buy a lot of companies listed on it because they have poor liquidity.

“We don’t buy or sell many Amex st
ocks because our experience trading on it has not been very favorable. Their specialists aren’t as well-capitalized as those on the New York Stock Exchange. They (the specialists) seem to disappear when the market goes against them.”

A merger could improve the liquidity and quality of the companies listed on the Amex, Mr. Schettewi says.

Under the new setup, broker-dealers will have a choice about the best way to trade stocks, and they will be able to change as the liquidity situation changes, Frank Zarb, NASD chairman, said at a news conference last week.

In 1997, average daily trading volume at the American Stock Exchange was a puny 24.4 million shares, vs. 526.9 million shares at the New York Stock Exchange, and 647.7 million shares on Nasdaq, according to figures compiled by each exchange.

Wayne Wagner, chairman of Plexus Group Inc., a Los Angeles firm that monitors trading costs of institutional investors, says its studies show trading costs are significantly lower on the Amex than Nasdaq, because the Amex offers a good mechanism for trading smaller stocks.

The Amex offered a cost advantage over Nasdaq of between two and 54 basis points as trades get larger, according to the studies.

“But if investors can trade on either exchange under the merger, money managers will quickly figure out which is the better deal for them,” he says.

Nasdaq will bring a lot of money to the table, which would help the Amex because it sorely needs to update its trading systems, Mr. Wagner adds.

Paul Hennessey, head of equity trading operations for Boston Partners Asset Management LP, says the SEC has been attempting to push Nasdaq toward a single-pricing system, and away from its traditional bid-ask system for more than a year and a half.

Although the spreads have narrowed, they still exist. Judging by that, he predicts it could be 18 to 24 months before changes to cut trading costs would be implemented by the merged exchanges.

The biggest challenge is finding the liquidity needed to trade large
blocks. As institutional holdings grow, they become more difficult to sell. A new, more liquid Amex could change that.

Jay Parsons, managing director and head of equity management and trading for Barclays Global Investors in San Francisco, says a merger would compress the spread between the bid and asked prices, and eliminate market makers in between.

“It’s a positive trend if Nasdaq becomes more order-driven than dealer-driven.”

Crain News Service