The National Association of Securities Dealers Inc. yesterday took a major step toward turning the Nasdaq Stock Market into a for-profit corporation, as the board unanimously approved a preliminary plan to spin off Nasdaq and sell shares in it.
With its vote to restructure NASD, as well as a separate vote yesterday to form an alliance with Primex Trading, an electronic trading network, the NASD is creating a potentially powerful new stock market designed to challenge the preeminence of the far larger New York Stock Exchange.
Both Nasdaq and the NYSE have been rushing to remake themselves to survive in a new environment, spawned both by technology that has created a host of competitors and by a Securities and Exchange Commission effort to eliminate a number of anti-competitive rules.
But the NYSE's major effort--a plan to go public by Thanksgiving--has been derailed for at least a year, while internal opposition has slowed efforts to shift substantial trading on the Big Board to electronic systems. NYSE officials yesterday declined to comment on the NASD's plans.
Frank Zarb, NASD chairman, said the NASD's plans are on schedule and may even move more quickly than anticipated. "I don't see any major issues" that need to be resolved, Zarb said at a news conference after the board meeting in New York. He said that remaining details will probably be worked out next week and a final board vote will likely be held in early January.
As recently as last week, the NASD's small brokers, led by Alan L. Davidson, a NASD board member and president of Zeus Securities Inc., had been critical of NASD's offering plan. Under the plan, shares would be offered to members proportional to the amount of business they bring to Nasdaq and to major companies whose stocks trade on Nasdaq.
Davidson had complained that the plan would disenfranchise small brokers, and he was angry that Zarb was not planning to put the proposal up for a membership vote until after the first batch of stocks were sold. Davidson vowed to push for a vote of the entire 5,500 members, and predicted Zarb's plan would get voted down in such a contest.
But after spending about 72 hours in meetings with Zarb this week, Davidson was singing a different tune. "I don't think there is a major issue that needs to be resolved. . . . Frank has been really great. He's very sensitive to the issues that have been brought up," Davidson said.
Davidson said he told the board: "Frank is like a bad mistress. When he's good, he's really really good. When he's bad, he's really bad."
Both Zarb and Davidson refused to say what changes, if any, Zarb made in the restructuring plan to satisfy Davidson and accommodate small brokers. But Davidson predicted that members would broadly support the plan.
Zarb also said that the preliminary plan will include the language that "the board recognizes that between now and the time the board votes on the final proposal, certain details will in all likelihood need to be modified for strategic reasons, including the timing of any membership vote, certain uses of proceeds and certain allocations."
The Primex Auction System, which is designed to replicate and automate the kind of trading floor found at the NYSE, will be offered to Nasdaq customers for use strictly on a voluntary basis. Nasdaq plans to offer the new system to trade Nasdaq and NYSE securities by summer of 2000.
Under the letter of intent signed yesterday, the Primex technology will be offered exclusively to Nasdaq in the United States. Nasdaq also has the option to license the technology overseas. Nasdaq has announced plans to create pan-European and Japanese electronic stock markets.
Nasdaq will share the development expenses with Primex and pay a licensing fee. Nasdaq officials declined to estimate how much the deal would cost the stock market.
Primex Trading members include Merrill Lynch & Co., Goldman Sachs Group Inc., Morgan Stanley Dean Witter & Co., Citigroup Inc.'s Salomon Smith Barney, and Bernard L. Madoff Investment Securities, which together account for about 60 percent of all the stock trades processed on any given day. They would thus have a financial interest in executing trades on Primex rather than the NYSE floor.