Wall Street backs survival of regional exchanges

Anuj Gangahar
28 November 2005
Financial News Online
(c) 2005 eFinancialNews Ltd.

With the looming consolidation in the trade execution space, as evidenced by the pending merger of the New York Stock Exchange with Archipelago and Nasdaq's acquisition of Instinet's Inet ECN, major players on Wall Street feared their execution choice would be reduced to a "duopoly" that could translate into reduced competition and higher trading costs.To Wall Street securities firms, the long-neglected regional exchanges, which perennially attracted a small share of the huge U.S. securities markets, suddenly became an attractive alternative to ensure that two major liquidity centers do not control U.S. securities trading.

All five regional exchanges have held talks or made deals with Wall Street firms this year, following the announcement of the NYSE-Arca merger. The Chicago Stock Exchange and the National - formerly known as Cincinnati - Stock Exchange are actively pursuing partners while the Boston Stock Exchange and the Philadelphia Stock Exchange have already sealed an alliance with six firms.

The recent investment by Morgan Stanley, Citigroup, UBS and Credit Suisse First Boston in the Philadelphia Exchange, alongside earlier investments by Merrill Lynch and Citadel Investments, mean the exchange is majority-owned by Wall Street. The exchange also agreed to an incentive plan for the new owners to drive more business through the exchange, a move likely to be aped by other regional players.

Citigroup, CSFB, Lehman Brothers and Fidelity have bought a stake in a new electronic equity market to be created by the Boston Stock Exchange.

Significant backing by large Wall Street banks also works for the derivatives exchanges. The Philadelphia Stock Exchange plans to develop the activities of the dormant Philadelphia Board of Trade with the help of broker and market-maker Susquehanna.

Meyer Frucher, chairman and chief executive of the Philadelphia Stock Exchange, said: "These alliances will help us become a strong, new competitive force in the rapidly consolidating securities exchange marketplace."

One analyst said: "The increased competition from regional stock exchanges should help keep trading costs low for individual and institutional investors."

Larry Tabb, chief executive and founder of the Tabb Group, the US consultancy, said the biggest challenge faced by buy-side traders was market consolidation.

In a recent report, Tabb argued that Nasdaq's acquisition of Brut and Instinet and the NYSE's proposed merger with Archipelago were unlikely to enhance liquidity and eliminate fragmentation.

Tabb wrote: "I don't think so. The tools and technologies that we have used to control and manage our trading better will fragment the market further, regardless of the number of trading electronic communications networks and market centers."

According to Wall Street sources, the Chicago Stock Exchange, which has completed plans to boost its auto-execution functionality, is shopping for partners. One source said the exchange is talking to electronic brokers who may make the most of the new execution platform.