When the Nasdaq Stock Market and American Stock Exchange say "I do," money managers and pension executives will receive the wedding gift -- lower trading costs.
However, institutional investors and pension officials caution it might take as long as two years after the marriage to realize any savings.
Institutional investors generally are upbeat about the merger because there doesn't seem to be a downside. On the upside, they see reduced competition, better service, faster access and increased revenue from the options business at the Amex.
But many questioned in a random Pensions & Investments survey said it is difficult to assess the potential impact because they don't have enough information about the form the new entity will take.
Roland Machold, director of the New Jersey Division of Investment, Trenton, quipped: "We have had problems with both exchanges, so it's hard to tell if our problems would double or be halved under the new arrangement."
The $63 billion pension fund, which actively manages three-quarters of its equities internally, has been executing the bulk of its small-cap trades through Instinet Corp. instead of Nasdaq because the spreads between the bid and ask prices on Nasdaq are too great, he said. Nasdaq stocks are bought on the bid price and sold at the offering price, which favors the market makers selling those stocks, but costs investors more than they pay under the single-price system used at the Amex and New York Stock Exchange.
"Previously, we did 80% of those trades on Instinet, but now it's around 60%, because the spreads have narrowed after an investigation by the SEC," Mr. Machold said.
He and other large investors complained about liquidity on the AMEX and said a merger might help.
"When the market goes down, the American Exchange specialists tend to duck out instead of supporting the prices," he said.
Last week, the boards of Nasdaq's parent company, the National Association of Securities Dealers, and the Amex voted unanimously for a merger. The full Amex membership will vote on the deal in May, which also must be OK'd by the Justice Department and the Securities and Exchange Commission.
Candace Cox, president at Bell Atlantic Asset Management Co., New York, said the merger wouldn't affect the $47.5 billion pension fund she oversees because most of its in-house portfolios are large-cap stocks. The small-cap stock portfolios are run by external managers.
S. Larry Prendergast, chairman of AT&T Investment Management Corp., Berkeley Heights, N.J., also doubted the merger would affect AT&T's trading, since only passively managed portfolios are run in-house.
"Some of our outside managers such as J.P. Morgan and Cap Guardian are able to negotiate very attractive commissions because of their size, so I don't know what other cost-savings we might see," he said. "But if the spreads tighten, there might be more."
Liquidity is a big issue at money management firms, however.
"The American Stock Exchange is a joke," said Phil Schettewi, managing partner at Loomis, Sayles & Co. LP, Boston. "They do little volume, and I'm not sure that many money managers buy a lot of companies listed on it because they have poor liquidity.
"We don't buy or sell many Amex stocks because our experience trading on it has not been very favorable. Their specialists aren't as well-capitalized as those on the New York Stock Exchange. They can't make a real market. They (the specialists) seem to disappear when the market goes against them."
A merger could improve the liquidity and the quality of the companies listed on the Amex, Mr. Schettewi said.
GIVING DEALERS A CHOICE
Under the new setup, broker dealers will have a choice about the best way to trade stocks, and they will be able to change as the liquidity situation changes, Frank Zarb, NASD chairman, said at a news conference last week.
In 1997, average daily trading volume at the American Stock Exchange was a puny 24.4 million shares, compared with 526.9 million shares at the New York Stock Exchange, and 647.7 million shares on Nasdaq, according to figures compiled by each exchange.
Wayne Wagner, chairman of Plexus Group Inc., Los Angeles, which monitors trading costs of institutional investors, said his firm's studies showed trading costs are significantly lower on the Amex than Nasdaq, because the Amex offers a good mechanism for trading smaller stocks. Nasdaq deals with several uncoordinated market makers. The Amex offered a cost advantage over Nasdaq of between two and 54 basis points as trades got larger, according to the studies.
"But if investors can trade on either exchange under the merger, money managers will quickly figure out which is the better deal for them," he said.
NASDAQ BRINGS MONEY
Nasdaq will bring a lot of money to the table, which would help the Amex because it sorely needs to update its trading systems, he said.
Paul Hennessey, head of equity trading operations, Boston Partners Asset Management LP, Boston, said the SEC has been attempting to push Nasdaq toward a single-pricing system, and away from its traditional bid-ask system for more than a year and a half. Although the spreads have narrowed, they still exist. Judging by that, he predicted it could be 18 to 24 months before changes to cut trading costs would be implemented.
The biggest challenge is finding the liquidity needed to trade large pieces of stock, he said. As institutional holdings grow, they become more difficult to sell. A new, more liquid Amex could change that.
Jay Parsons, managing director and head of equity management and trading, Barclays Global Investors, San Francisco, said a merger would compress the spread between the bidding and asking prices, and eliminate market makers in between.
"It's a positive trend if Nasdaq becomes more order-driven than dealer-driven. You see the order books with the American Stock Exchange, but you don't with Nasdaq. It would be better for institutional investors if the new exchange is more order-driven with more centralized information," he said.
It also could offer faster, more efficient electronic access to derivatives, particularly options on the Amex, he said.