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Tim Quast
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January 1, 2000

Nasdaq Restructuring Moves Forward

By William Hoffman

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  • Nasdaq Restructuring Moves Forward

News bulletins breathlessly recounted the reports: the forthcoming Nasdaq restructuring, initially valued up to $1.4 billion, would take place in two stages of stock privately placed to trading firms, issuers, and market participants. Each shareholder would be limited to a 2.5 percent stake.

By the fall of 2000, "75 percent of Nasdaq would be owned by market participants and membership," John Hilley, chairman and chief executive of Nasdaq AMEX International, told November's meeting of the California Association of Independent Broker Dealers.

Earlier this month, his words seemed to hold truth. On Jan. 4, the board of the National Association of Securities Dealers unanimously approved a two-step private stock offering of up to 79 percent of Nasdaq.

About $1 billion is expected to be generated. The proceeds will benefit Nasdaq technology and other areas. (As part of the restructuring, Nasdaq will seek to register as an exchange.)

The first phase of the private placement, a stake of up to 49 percent in Nasdaq, would take place as early as April or May, pending membership approval. The second phase, targeted for mid-2000, will depend in part, on Nasdaq creating a suitable operational structure for itself as a for-profit exchange.

The Result

In the end, 25 percent of Nasdaq would be owned by NASD members; 32 percent would be owned by market makers and other major market participants while 16.5 percent would be owned by companies that trade on Nasdaq. If Nasdaq later embarks on an initial public offering, equity in Nasdaq would be allocated to NASD members.

"I don't think [an IPO] is going to happen soon," said Jay G. Strum, senior partner at the securities and corporate litigation firm of Kaye, Scholer, Fierman, Hays & Handler, in New York. "Before it can happen, Nasdaq has to think through the regulatory scheme that will make it work after it happens."

Back in July, when demutualization was just a glimmer in the exchange executives' eyes, Securities and Exchange Commission Chairman Arthur Levitt made clear he was thinking these things through. "As markets consider the potential advantages of demutualization, you must also consider the impact of such changes on the effectiveness of your self-regulatory functions," Levitt wrote in a July 9 letter to NASD Chairman Frank Zarb and New York Stock Exchange Chairman Richard Grasso. "I want you to understand that approval of these changes will depend upon investors' interests taking precedence over all others," Grasso and Zarb have stated that they share these concerns.

"My reaction is that [the exchanges] don't really have a master plan," said Strum, who served as a trial attorney in SEC's enforcement division in the mid-1960s. "It seems to me the objective is to share in this [stock] boom," he said. "Each of these entities is looking for a way to cash in."