While all eyes are watching Nasdaq to see if it can make a dent in the New York Stock Exchange's longstanding 80% market share in listed stock trading, the Philadelphia Stock Exchange could be the one to do it.
The reason is the recent financial backing it got from market heavyweights Merrill Lynch & Co. Inc., New York, and Citadel Investment Group, Chicago.
"If Merrill Lynch and Citadel are posting (stock orders) in Philly, people will be forced to go there if they have the best price," said Joseph C. Gawronski, chief operating officer at Rosenblatt Securities Inc., New York.
In June 2006, the Securities and Exchange Commission's Regulation NMS takes full effect. And for stock exchanges in the United States and the investors who use them, one of the biggest changes will be the so-called order protection rule, which will require that stock orders be sent to the market center with the best posted price — provided that order can be automatically executed.
That means if the Philadelphia exchange, which is the fourth largest options exchange in the U.S., has the best posted bid or offer for a stock and it can execute orders automatically, orders will go there before anywhere else.
Mr. Gawronski believes the Merrill Lynch and Citadel investment was driven by Reg NMS, noting the deal "illustrates one of the things that Reg NMS did, and that is that as long as a quote is automatically executable, it has to be routed to the place with the best price."
"Without Reg NMS, I would argue that Philadelphia would have a very short lifeline," said Seth Merrin, chief executive officer of Liquidnet, New York, an electronic platform for institutional investors to trade blocks of stock.
"With Reg NMS, what we're going to see, I believe, is electronic market-makers coming onto some of these regional exchanges and picking specific issues that they want to make markets in," Mr. Merrin said. "It's an opportunity for a bunch of competitors to be making very tight spreads in a number of issues and for the first time it doesn't matter where. There's a much lower price barrier to doing it on Philadelphia" than on the NYSE.