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NASDQ, NYSE merger would help neither exchange, analysts warn

http://www.jewishworldreview.com | (KRT) NEW YORK The Nasdaq Stock Market denied Tuesday that it pitched a merger plan to the New York Stock Exchange.

The report in the Wall Street Journal Tuesday cited anonymous sources. No formal proposal has been made, and serious talks have not yet begun, the report said, but Nasdaq CEO Robert Greifeld suggested the merger talks began three weeks ago.

An NYSE spokesman declined comment on the report, saying the exchange did not comment on "rumor and speculation."

The Nasdaq said in a statement that the report "had no basis in fact" and a Nasdaq spokeswoman said the rumor was not surprising "when there is such broad acknowledgement that the NYSE needs to evolve" to a market structure similar to the Nasdaq.

The Nasdaq has been hit by the collapse in technology stocks and by electronic communication networks winning market share, while the Big Board has been shaken by the scandal surrounding the pay of former chairman Dick Grasso, as well as alleged abuses in its specialist system.

If the two merged, there would be a near monopoly on the trading of U.S. stocks. In 1999, the two exchanges considered but rejected a merger, the report said.

The distinct trading styles of the two exchanges - the NYSE relies on an open outcry system, while the Nasdaq uses several interconnected computers - would also make a merger difficult.

The proposal drew immediate criticism from analysts. Jodi Burns, a market analyst with the consulting firm Celent, said the proposal was akin to "breeding a dog and a cat." A merger would also effectively wipe out meaningful competition by creating a giant with almost a complete monopoly.

"There are no synergies," she said. "The technology at the Nasdaq would wipe out the specialist model. It's not simply splicing the best of Nasdaq and the best of the NYSE. The two market structures are incompatible."

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Burns added that some stocks trade better in a dealer-based electronic system found at the Nasdaq. Others - more complex trades that require human interaction - do well on the NYSE. For those reasons, Burns believes incoming chief executive John Thain will reject the proposal, despite his active work in electronic trading.

Still, it would not be unprecedented to have a single stock exchange in the United States, according to Michael Goldstein, a former NYSE visiting economist and current member of an economic advisory panel to the Nasdaq.

"It reverts to the model we had in the 1920s," he said. ``But it doesn't make sense from a market systems standpoint."

Goldstein said the Nasdaq spun off the American Stock Exchange after the exchanges had difficulty merging. The Amex is similar to the NYSE in the way it handles trades.

"That history doesn't bode well for a merger" of the NYSE and Nasdaq, Goldstein said.

Through Dec. 4, the Big Board has added 88 new listings in 2003, while 38 companies have delisted, bringing total listings to 2,754. None have moved to the Nasdaq, according to the NYSE.

More than $22 billion in initial public offerings have been made on the NYSE through the first nine months of 2003, ahead of last year's pace, which netted $25 billion for the full year.

Earlier this month the NYSE reported net income of $6.9 million for the third quarter, up from $279,000 in the same period last year. The NYSE said revenue fell 1 percent to $265 million compared to $268 million in the same period in 2002. Net income in the first nine months of 2003 was $33.9 million, compared with $20.9 million in the same period in 2002.

Meanwhile the Nasdaq has been accelerating its efforts to widen the technological gap it enjoys over the Big Board.

Recently, Nasdaq announced a new plan to allow Instinet ECN's electronic trading platform the use of its institutional trading system. It also has applied to become an exchange through the Securities and Exchange Commission. The change would give it a self-regulatory license. The Nasdaq is currently a stock market.

The Nasdaq has also pared operations, selling off its Japanese and European units.

But all the changes have failed to halt the slide in Nasdaq market share. Between the start of 2001 through October, the Nasdaq has lost more than 600 listed companies to 3,367, according to company financial reports.

The shrinking has translated into losses. Nasdaq had a net loss of $46 million in the third quarter.

So wouldn't a merger help to solve the systemic issues at the NYSE and help the Nasdaq's eroding profitability? Celent's Burns says no.

"Agreeing to a merger so soon is like amputating the arm to fix a paper cut," she said. "Not that the NYSE's problems are a paper cut, but this is too much."

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