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NYSE, Nasdaq had talks
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March 3, 2000: 1:33 p.m. ET
NASD rejected recent NYSE merger offer, according to official with group
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NEW YORK (CNNfn) - The New York Stock Exchange made a merger proposal to Nasdaq recently that was rejected by the board of the National Association of Securities Dealers, which owns the electronic stock market, according to an NASD official.
The official, who spoke on condition that his name not be used, said that the board believes it is better to pursue an initial public offering for the growing-tech heavy market rather than wade into uncertain merger discussions.
"It would be a mistake to drop that very positive effort to pursue merger discussions that could take many months or more," said the official.
No comment for NYSE officials
Officials with the NYSE had little comment about possible merger discussions with its rival.
"As we have said in the past, everybody in the industry is speaking with everybody else," said a spokesperson for the exchange.
The Wall Street Journal broke the story about the discussions, saying they were explored as a way of holding off growing competition from other exchanges and equity trading systems. But the Journal report said such a merger was unlikely.
The contacts are described in a private-placement memorandum outlining NASD's plan to sell shares in its Nasdaq market.
"The rapid evolution of the worldwide securities market requires the NASD and Nasdaq to be pro-active," the memo said, according to the Nasdaq official. He also said the memo is a work in progress and has not been sent to members.
On the record, a spokesman with the NASD said there was nothing to report about discussions at this time.
"There are currently no negotiations, no agreements and no deals between us," spokesman Scott Peterson said. Asked about the reports of past discussions, he responded, "We talk with everybody, including the New York Stock Exchange, all the time about possible arrangements."
The NASD said last year it was looking at spinning off its NASD Regulation operation into an independent entity to be merged into the New York Stock Exchange regulatory operations. It also said it was considering a possible sale of part of the market in two steps: a private placement for key Nasdaq-listed companies and key member firms, and then an initial public offering.
Pressure from major brokerage firms
Major Wall Street brokerage firms have pushed for electronic links and transparency between the markets, and for centralized securities regulations. The Journal reported that, privately, brokerages grouse about having to maintain membership in separate markets that compete with one another for equities and issues.
The heads of four major brokerage firms testified in favor of greater centralization before the Senate Banking Committee earlier this week, while officials from the two markets objected to such proposals.
"The genius behind U.S. stock markets' innovation is not a centrally prescribed single market, but free competition," said NASD Chairman Frank Zarb at the hearing.
The Journal's report said that after that hearing, Zarb held a conference call with the NASD board, during which he said there had been discussions about a purchase of Nasdaq by NYSE. But the paper said there hadn't been much support for the idea.
Major differences between market structures
The two markets are structured very differently. At the NYSE, each stock has a single specialist firm that manages the auction process of that equity. On the Nasdaq, there might be dozens of market makers in the larger capitalized stocks that trade its shares.
Many of the NYSE shares are still conducted on an open trading floor with orders shouted by traders, while the Nasdaq is an electronic market that does not have a trading floor.
But the differences between a specialist-driven exchange and an over-the-counter market did not stop the merger in 1998 of the Nasdaq and the American Stock Exchange, which still operates on a specialist model.
The NYSE and Nasdaq face growing competition from the electronic communications networks, or ECNs, which allow buyers and sellers of stocks to meet without the use of specialists or the market makers of the Nasdaq market. According to Greg Smith, analyst with Hambrecht & Quist, about 30 percent of trading volume of Nasdaq shares are conducted by ECNs.
Several of the ECNs have filed for exchange status, and they are pushing the established markets to examine extended hour trading. 
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