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July 31, 1999

The Two IPOs of the Century?

By William Hoffman

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The New York Stock Exchange is looking to go public, a move that comes just a few weeks after Nasdaq said it might do the same thing.

Asked about these reports, a Big Board spokesman Ray Pellecchia said the exchange had no comment.

But days later the Wall Street Journal reported that Big Board staffers had quietly approached investment banking giants Merrill Lynch & Co. and Salomon Smith Barney to explore the IPO route. That is the same route that Frank Zarb, chairman of the National Association of Securities Dealers, held out as an option for Nasdaq in the NASD's ongoing restructuring efforts.

Merrill Lynch and Salomon Brothers, along with several other Wall Street investment banks, declined to comment on both the NASD and Big Board reports.

But some traders were not so reticent.

"I'm in favor of an IPO for both exchanges if it materially benefits the bottom line of our firm," said Ben Marsh, head of Nasdaq trading at Boston-based Adams, Harkness & Hill, an NASD and Big Board member firm.

Disparaging of the Idea

The Big Board has been almost disparaging of the idea of an IPO for its organization. Big Board Chairman Richard Grasso was quoted in May saying that, with only 18 percent of trading systems capacity used during an average day, analysts and shareholders might demand a career change for a chief executive who suggested taking the exchange public. Nonethless, the Big Board needs to invest in extra capacity for trading spikes, Grasso noted. "Those are investments, as a public company, I'm afraid we would not be willing to make," he said.

According to the Wall Street Journal, however, it was Grasso who instructed Big Board staffers to approach Merrill Lynch and Salomon Brothers.

By contrast, NASD Chairman Frank Zarb, recently addressing the National Press Club in Washington, said an IPO is one option executives are considering to revamp the organization.

Most recently, the NASD board increased the likelihood of an IPO for Nasdaq. The board authorized a plan that calls for staff to consult with NASD members on the implications of a for-profit Nasdaq in which the NASD is a minority partner.

The plan also requires the NASD staff to start work on the registration process with the Securities and Exchange Commission and, separately, to make provisional agreements with potential equity participants.

Stock exchange IPOs offer interesting possibilities, some experts say. "It struck me as innovative, to say the least," said Kathleen Cerveny, a partner at Falls Church, Va., commercial law firm Hazel & Thomas, PC. Joel Barth, principal in the corporate finance group at regional accounting and consulting firm Richard A. Eisner & Co., in New York, said of Nasdaq, "It's a brand name known 'round the world, which portends well for an IPO. It's unique." No doubt the same is true for the NYSE.

Cash Flow

Stock markets especially Nasdaq offer a steady cash flow from fees, observers noted. A publicly-traded exchange stock could also forestall opposition to NASD self-regulatory plans.