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September 30, 1998

The Regionals Under Siege

By Michael L. O'Reilly

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Have you ever heard of the Baltimore Stock Exchange? No? How about the Minneapolis Stock Exchange?

No again?

Well, Baltimore and Minneapolis used to have their own equity exchanges. So did Cleveland, Milwaukee, Seattle, St. Louis and Washington.

In fact, four decades ago, there were 21 stock exchanges in the U.S. Last year at this time, there were eight: the New York Stock Exchange, the American Stock Exchange, Nasdaq, and the remaining regional stock exchanges in Boston, Chicago, Cincinnati, Philadelphia and San Francisco. (The Pacific Exchange maintains its headquarters in San Francisco, but has trading floors in both San Francisco and Los Angeles.)

This year, a flurry of activity spurred by the proposed acquisition in March of the AMEX by the National Association of Securities Dealers, Nasdaq's parent has begun a new consolidation among this country's exchanges.

In June, the Philadelphia Stock Exchange (PHLX) announced its intention to join the merger between the AMEX and the NASD.

The following month, the Pacific Exchange (PCX) entered an agreement with the Chicago Board Options Exchange (CBOE) to merge.

With the PHLX and the PCX both undecided about the future of their equity operations, the list of U.S. stock exchanges may shrink to six, and counting.

A combination of factors chiefly declining profitability and the high cost of technology upgrades amid increased competition for orders have led the regionals to dramatically rethink the future of their operations.

"I think we're still in the middle of this period of consolidation," said Warren Langley, president of the PCX. "The regionals are going to have to gain a critical mass to compete with the other exchanges, the third market, electronic trading. The size of that critical mass is growing, and to go it alone is going to be very difficult."

Langley admitted that the PCX had been looking for a partner for almost a year, but did not engage in serious discussions with the CBOE until early this summer.

He said the AMEX's merger with the NASD and the rumors of further consolidation that ensued intensified the PCX's search for a partner.

Thomas F. Ryan Jr., president of the AMEX, admitted the NASD and AMEX announcement was likely a catalyst for much of the merger talks among U.S. equity exchanges.

Indeed, David Colker, chief executive of the Cincinnati Stock Exchange (CSE), said the proposed $200 million technology investment in the AMEX has forced his exchange to look for a possible partner.

"The NASD merger with the AMEX set about a lot of rethinking in the industry," Colker added. "The AMEX is committed to expanding electronic trading, which will make it more cost-effective. That is what's pushing us. We need to make sure we stay efficient and competitive."

Colker said the CSE at the urging of its members and broker dealers is currently looking at a number of opportunities.

Separately, Boston Stock Exchange (BSE) Chairman and Chief Executive William G. Morton Jr. said the BSE has been involved in serious merger talks with the CSE.