The two major exchanges, NYSE and Nasdaq, have both announced their purchases of electronic trading systems. The New York Stock Exchange will merge with Archipelago, and Nasdaq will buy the electronic trading platform of the Instinet Group. The deals are expected to bring in fresh spirit and new ideas into the once clubby business closed to outsiders.
"It’s incredible," said Jamie Selway, economist at White Cap Trading in New York and a former economist at Archipelago. "If you told me in 2003, at the height of the Dick Grasso era, that by mid 2005 we would be pretty close to a reinvention of the stock markets, I would have told you ’no way!’"
Consumers can hope that the deals that have already been labelled as reshaping the market for stock trades will lead to greater transparency and help to slash trading costs. The deals, however, are also subject to the regulatory approval.
Nasdaq will likely become the top market for Nasdaq-listed stocks and will be able to compete with NYSE in price.
"This strategic move is courageous, almost unbelievable, but this is going to make the New York Stock Exchange in my opinion a potentially giant publicly traded company. The main reason is they’ve got brand, they’ve got companies, they’ve got liquidity (and) with Archipelago they have electronic global access," said Harold Bradley, of Kansas City, Mo.-based American Century Investments.
The acquisition reflects the policy of Nasdaq Stock Market new chief Bob Greifeld who launched a large-scale overhaul of the exchange. The new boss on his first day of running the business fired two top executives, and struck a deal to Instinet’s fast technology that operates on a first-come, first-served basis. Nasdaq can expect to regain its share of the market, boasting over 80% of the deals in the stocks it lists. The transaction that will save the stock exchange more than $300 million in costs over three years, has also caused it to incur debt totalling $950 million, restricting its future strategic options.
The purchase of Instinet follows a real PR war that Nasdaq officials waged against rival electronic platforms like Instinet and Archipelago that threatened to defeat its reputable competitors. Nasdaq executives did not hesitate about exposing conflicts of interest Instinet and Archipelago encounter when selling services to both brokerage houses and their large investors. They once distributed T-shirts at a conference that carried the inscription: "They came for your business -- and left with your customers." Now Nasdaq has solved the problem by acquiring the competition.
The New York Stock Exchange is doing its best to keep pace with the closest rival. The exchange has to reform itself following scandals, one of them about the $200 million plus in compensation awarded to former NYSE chief Dick Grasso for his 35-year stance at the exchange. The award resulted in a demand by New York State Attorney General to return a part of the package. Besides, in another recent scandal 15 traders and specialists were charged with trading for their own benefit rather than in the best interest of the client.
The 212-year-old institution has been able to acquire Archipelago, a system known for its expertise in trading options, bonds and exchange-traded funds. Perhaps even more importantly for consumers, the NYSE has announced it will go public and become a for-profit organization. The incorporation of the exchange has long been rumored, but now the decisive moment has arrived.
The once tightly controlled market for stock trades is not witnessing the toughening competition forcing century-old establishments like NYSE to change its practices to meet new challenges. Future is likely to see the proliferation of electronic trading and even greater cost reduction, as well as increased control over the actions of stock market participants.