For the Nasdaq Stock Market, the high-tech boom is fast proving to be a double-edged sword.
Hundreds of young Internet companies--from Yahoo Inc. to Amazon.com Inc.--have flocked to the world's second-biggest stock market to sell their shares to the public. But the technology that has propelled the Nasdaq to record highs has also yielded new ways to sell stock without a traditional market.
So, today, the board of National Association of Securities Dealers, which operates Nasdaq, will meet in New York to draw up a blueprint for future competitiveness.
Up for discussion will be a variety of options, including spinning off the 28-year-old stock market into a for-profit entity and linking with companies called "electronic communications networks," known as ECNs.
About a third of Nasdaq's trades are made by these tiny electronic communications networks, which charge a fraction of the cost charged by traditional brokerage firms. Currently, all those trades still pass through Nasdaq. But many networks have applied to become stock exchanges independent of Nasdaq.
Jim Lee, president of NASD member firm Momentum Securities, said Nasdaq charges members $2.50 per trade to use its Select Net service, while the communications networks are charging private investors as little as a nickel per trade. "It's like the post office--they're set in their ways," Lee said. "They'll continue to lose until they modify it."
"They [Nasdaq] see an encroachment from ECNs and they have a network of dealers and brand equity, which they want to use to benefit their members," said Lawrence J. White, a professor of economics at New York University.
NASD has not said how much it hopes to raise. "The market will decide," said Frank Baxter, chief executive of Jefferies & Co. and NASD board member who has been leading the research into the plan for the past 10 months, working with Salomon Smith Barney. He said that $1 billion would be "conservative."
At the meeting today, the NASD board will also discuss how the proceeds from a share offering would be used. Issues include how much money will go to the NASD's regulatory arm, the timing of any offering and who will govern the market. Nasdaq officials said they expect to first do a private placement of shares and perhaps ultimately offer shares to the public.
Nasdaq is facing pressure in part because its main rival, the New York Stock Exchange, hopes to offer shares in that venerable exchange by Thanksgiving.
Shedding its not-for-profit garb will enable Nasdaq to function like any other competitive corporation, including making acquisitions. "Being a for-profit entity gives you the energy and flexibility to respond to technological changes," said Hans R. Stoll, professor of finance at the Vanderbilt University.
A key issue intertwined with Nasdaq selling shares in itself is its role as a regulator. NASD, like the Big Board, is a self-regulatory organization and is responsible for surveilling its market to prevent abuse. Both the NASD and the NYSE police members and look out for suspicious trading patterns. They conduct exams of brokers, for example, and kick out members who break the rules.
Critics of Nasdaq share-selling plans believe it will be difficult for the market to strike a balance between its shareholders' interest and the interests of the public.
"Regulation is a pure cost. You don't make money out of hiring lawyers, examiners and handling arbitrations," said David Bayless, a securities lawyer at Morriston & Foerster, who until recently ran the SEC's San Francisco office.
Arthur Levitt Jr., chairman of the Securities and Exchange Commission, has already raised questions about how Nasdaq--and also the NYSE--will govern itself after it sells shares. In identical letters sent Monday to NASD Chairman Frank G. Zarb and NYSE Chairman Richard Grasso, Levitt implored them to ensure "the self-regulatory role will continue to be zealous, adequately funded and imbued with the public interest."
NASD has not disclosed who will be allowed to buy its privately placed shares but has indicated five potential categories of eligible purchasers: existing members, major securities firms, major corporations listed on Nasdaq, major investors and technology companies.
The NASD's structure makes it difficult to combat new competitors. Not only do its officials have to get thousands of members in sync, but also the organization has three different boards of directors--one for the parent company and one each for the regulatory arm and the Nasdaq market.