The National Association of Securities Dealers board agreed yesterday to push forward with a plan that could eventually convert the Nasdaq Stock Market into a for-profit entity with publicly traded shares.
The Nasdaq, the nation's second-largest market, after the New York Stock Exchange, faces competitive threats from new electronic trading networks that can execute trades less expensively. A stock offering would bring in cash that would allow Nasdaq to make acquisitions and upgrade technology, and officials hope the new corporate structure would streamline a cumbersome membership organization that they say has hindered decision-making.
"We need to change our governance to make decisions more quickly in an increasingly competitive environment that values speed," NASD Chairman Frank Zarb said.
The NASD is an industry group that owns both the Nasdaq market as well as the self-regulatory organization that polices Nasdaq traders. The NASD plans to keep a minority stake in the market after selling shares to selected investors that include securities firms, companies whose shares trade on the exchange and technology partners. Eventually, shares may be offered to the public, but in the first round, shares will only be offered on a privately arranged basis.
The NASD board also approved a plan to seek partnerships with large technology companies to help Nasdaq move to an Internet-based technology system, allowing improved investor access to the market. A number of major technology companies, including Microsoft Corp. and Cisco Systems Inc., are listed on Nasdaq.
The board did not decide on a time frame or the exact mechanics of the corporate restructuring, but it appointed a committee headed by former Treasury undersecretary Robert Glauber to begin laying the groundwork for selling the stock. The committee will comprise a cross-section of NASD board members who were not part of another group that has studied the governance and restructuring options for Nasdaq over the past 10 months.
Being a shareholder-driven entity would enable Nasdaq to react to competitive pressures quickly. Besides, tying up with key market participants will help Nasdaq consolidate a highly fragmented market and possibly meet the challenge from alternative trading platforms.
"Beyond the direct benefits of the restructuring, . . . improved price discovery is the real goal here," said Michael W. Brown, retired chief financial officer of Microsoft and an NASD board member.
Frank Baxter, chief executive of Jefferies Group and another NASD board member, said the plan would allow Nasdaq to better align the interests of the market with those of its key participants, provide an initial infusion and ongoing access to capital, and make it more agile in responding to industry and market conditions.
Since the Securities and Exchange Commission forced Nasdaq dealers to publicly display their customer orders two years ago, several electronic communications networks have sprung up to cash in on the chance to fill those customer orders before the dealer does. And this year, the SEC approved a rule that allows alternative trading systems to apply to become stock exchanges themselves.
As a result, many of the ECNs--which account for 30 percent of the daily trading volume on Nasdaq--have applied for an independent status, threatening the traditional exchanges such as the NYSE and Nasdaq. The NYSE also plans to issue shares to the public.
Nasdaq is more vulnerable to the online competition. The Big Board has a floor-trading system in which buy and sell orders meet on a physical trading floor. A "specialist" in each stock is responsible for matching buyers and sellers and maintaining an orderly market.
Unlike the NYSE, Nasdaq does not centralize trades through a specialist. Instead, it allows multiple market participants to trade through a computer network that links buyers and sellers.