Early October is likely to be when the American Stock Exchange, the third largest stock market in the United States, will merge with the Nasdaq Stock Market.
The American Stock Exchange, or Amex as it is known, is strong in options and derivatives and will become a wholly-owned subsidiary of Nasdaq, the US's second largest stock exchange, after the New York Stock Exchange (NYSE).
It is an interesting combination. Amex uses an auction sell system - that is, where brokers shout out bids and offers on a trading floor - and Nasdaq is a purely electronic system where all the trading is done by telephone and computer links. Together they will create a vastly more competitive rival to the NYSE although Nasdaq and Amex will still operate as separate entities.
The Washington DC-based parent of Nasdaq is the National Association of Securities Dealers (NASD). It has pledged to provide $110 million (£75 million) for Amex to improve its trading technology, an upgrade that could send seat prices higher. Amex currently has 864 seat holders, that is, members of the exchange. The seat stabilisation fund that will be paid to Amex members after five years will be $50 million, raised from an original offer of $30 million. NASD will also spend $30 million on an advertising programme for both exchanges.
By an integration of the two exchanges, companies will now have the choice of listing on an electronic exchange or one that operates an auction market. Nasdaq where some Irish companies have already listed, favours high-technology companies.
NASD will oversee both exchanges and hopes to create a market of markets built on a global computer network. The deal, which the two exchanges agreed to in April, is just now waiting for the approval of the Securities and Exchange Commission.
In recent years, Nasdaq has been the fastest growing exchange and has surpassed the NYSE's Big Board in daily trading volume. In 1997, it had an average daily volume of 647.8 million trades compared to the NYSE's average daily volume of 526.9 million.
NASD has shown it is not shy about acquiring. It has also brought the Philadelphia stock exchange under its umbrella and is in discussions with the Deutsche Bourse in Frankfurt.
However, the NYSE is still richer because it trades 3,094 mostly large stocks. In 1997, it had market capitalisation of $9,413.1 billion and is in talks to link with the Paris stock exchange. Nasdaq had market capitalisation of $1,834.8 billion in 1997 and deals in 6,010 stocks. This is still a huge growth from the days in the early 1970s when it arrived as the automated quotation system for the over-the-counter market.
Then in the 1980s and 1990s, its reputation was sullied when investigations into improper trading practices surrounding Nasdaq companies took place. Last December, more than 30 Wall Street firms agreed to pay $1 billion to settle price fixing charges that they kept the spreads on trades artificially wide.
But certainly the Nasdaq stock market has been technologically innovative. It is the largest electronic screen-based market in the world with the capacity to handle in excess of one billion shares a day. As of June 1998, it had 519 active market makers and 61,720 number of positions, that is, traders trading on it. Its frequent technological upgrades have allowed traders to move from using telephones to trading instantaneously online.
In the financial district of New York, the biggest of the market makers are JP Morgan, Lehman Brothers, Goldman Sachs, Morgan Stanley Dean Witter, Merrill Lynch and Salomon Smith Barney. Salomon Smith Barney has the biggest presence on Nasdaq as the largest investment bank and trades 1,000 stocks. JP Morgan, in comparison, trades 160 stocks.
To the average Wall Street trader who trades up to £500 million a day on Nasdaq, the merger with Amex will mean little difference.
His typical desk holds a Nasdaq workstation, an Instinet screen (which is an anonymous electronic trading network owned by Reuters and on which 25 per cent of all Nasdaq trades take place), and an order/flow box which allows him execute on screen rather than by the buy-and-sell paper tickets in use on the floor of the NYSE.
"Ours is a quote-driven market," said one Nasdaq trader who declined to be named. "At the NYSE there is an auction with one broker outbidding and outselling another. Generally, on NYSE there is one specialist in one stock. On Nasdaq, each trader has a fixed number of stocks each and that could mean as many as 20. But the bottom line for a trader is to buy stocks low and sell them high," he said.
The attributes of a good trader, he added, are "memory skills, reaction to the market and aggression". In perhaps a sign of the fiercer competition to come, he said: "Nasdaq is way more dynamic than the NYSE."
