Will the Big Board be welcoming a little brother to its family anytime soon? Well, while it has neither received nor made a formal proposal, the New York Stock Exchange has recently talked with the National Association of Securities Dealers (the NASD) about acquiring the American Stock Exchange. Through such a purchase, the NYSE would not get much of a push for its already dominant equities business, but would be able to expand its horizons by acquiring the Amex's valuable equity options and exchange-traded fund (ETF) product lines. Today, the Amex has less than three percent of the overall volume of the U.S. equity markets. However, it is the second-largest U.S. equity options exchange (behind the Chicago Board Options Exchange) and is the number one market for trading of ETFs.
A NYSE spokesperson says the Big Board was recently approached by Citigroup Inc.'s Salomon Smith Barney -- the investment bank the NASD has hired to advise it on a potential sale of the Amex -- but declines to provide further details. However, an industry source close to the NYSE says that the main reason the Big Board is interested in the Amex is because the exchange, which now trades around 107 ETFs, has demonstrated a knack for innovation.
"Amex's very survival is contingent upon creating new products and experimenting in new markets. They've created new products and are constantly thinking of new ways to attract investors and serve the investment community," says the source. " That would be, to me, the greatest draw for a possible combination."
By uniting with Amex, he says, the NYSE could provide itself with an outlet for experimenting with new products and trading systems. Moreover, the source says, from an equities perspective, the NYSE and Amex are synergistic, because they both run specialist-driven auction markets and employ similar trading systems.
The exact impact that a NYSE/Amex union would have on the exchanges' equity trading systems remains unclear. Amex actually licenses its incumbent equity-order book from the NYSE, but plans to move to a new OM-based order book in the near future. Moreover, the Amex and NYSE both run their own floor-based order-routing systems and handheld PCs.
That said, while emphasizing that it is too soon to say what technology direction the exchanges will take should they merge, Sang Lee -- an analyst covering e-trading at the research and consulting firm Celent Communications -- says it would make sense for the NYSE and Amex to run their systems in parallel on an interim basis. " I think in the short term, they would likely run similar systems side-by-side. But in the long term, in order to gain any kind of cost savings, those systems will have to be integrated," he says.
In a prepared statement, Amex said it is working with its parent to "establish an appropriate time table for our eventual separation from the NASD." NASD officials declined to comment.