Philly's Last Shot?

Traders are wondering whether the rumor of a Big Board bid for the tiny, troubled Philadelphia Stock Exchange is more than hopeful hype.
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As an alternative to the Options Forum this week, here is a report from the Options Industry Council conference in California.

CARLSBAD, CALIF. -- The man now most responsible for the fate of the

Philadelphia Stock Exchange

may be Richard Grasso, the head of the

New York Stock Exchange

.

Of all the strange twists the Philly's course has taken -- a management scandal, an aggressive takeover bid by the

Chicago Board Options Exchange

and, last week, the

end of its long

Nasdaq-Amex

merger talks -- the strangest may be the recent emergence of the Big Board as a rumored suitor.

While a Big Board-Philadelphia deal is laughed off by many in the industry, Philly sources say top officials of the two exchanges have been in discussions for the last week. There are even whispers that an announcement could come as soon as next week, those sources say.

A NYSE spokesman declined to comment Thursday.

There are many nonbelievers. "What's happening is rumors flying around, particularly after

PHLX head Meyer "Sandy" Frucher distanced himself from the Amex," says Francis Recchuiti, an attorney who represents PHLX member Joseph D. Carapico. Carapico is a dissident member of the Philadelphia who sued to stop the merger with Nasdaq-Amex.

But the implausible deal -- it's implausible mostly because the Big Board sold its options unit to the CBOE in 1995 -- also is being seen as a last-ditch attempt by the Philadelphia Stock Exchange to partner up. The exchange has a small stock-trading business, and its options business is the smallest among the four competing exchanges. On top of that, its premier options listing,

Dell

(DELL) - Get Report

, will likely be traded on the other exchanges before the end of 1999.

"We've cleaned up the house in terms of technology and governance. Stay tuned," says Frucher, who was spending the latter part of the week at the

Options Industry Council

conference here. "It's a great feeling to get off the mat."

Frucher may see the Philly coming off the mat, but others around the options industry are wondering if the NYSE talk isn't just bluster. "Why buy the PHLX when they've already gotten out

of the options business? Let alone at a cost being driven by a membership that needs all sorts of capital infusion for future infrastructure," said one CBOE floor trader.

Why might a deal make sense? "Beats me," was the analysis given by a former Dell options trader at the Philly. "It doesn't seem like NYSE's style, frankly."

The trading world, however, has changed since the Big Board dumped the options business. The emergence of electronic communications networks, or ECNs, has the venerable open-outcry exchange considering listing Nasdaq stocks and extending trading hours. The competitive pressure is now at a unique level.

"What scares the NYSE is the Nasdaq-AMEX merger," said a source with the Pacific Exchange, which once embarked on its own ill-fated attempt to merge with the larger CBOE.

The deal does make sense, according to large PHLX seat holders, who are excited by the NYSE's deep pockets and fear that the Nasdaq-Amex options business could overtake them. "If George Soros wanted to buy a condo in your neighborhood, wouldn't you be excited?" said one floor broker in Philadelphia.

Philadelphia is essentially a two-trick pony: it holds one franchise stock listing, Dell, and a scattered assortment of other options, including some important sector indices. In terms of market share, the Philly gets 11.3% of the nation's options volume, well behind the CBOE's 49.1%, the Amex's 25.1% slice, and the Pacific Exchange's 14.6%.

A key player may yet turn out to be Paul Liang, a major seat owner on all of the options exchanges. With 79 seats on the Philly, as well as 44 on the Pacific, 12 on the CBOE and 7 on the Nasdaq-Amex, the former options trader was delighted to see the PHLX remain independent. Liang has also reportedly been hankering for the PHLX to consider going public.

The other wild card is the potential for an electronic linkage system that would route an order to the options exchange with the best quote. That would put the Philly in a position to gain better footing by keeping spreads as tight as possible.

The Securities and Exchange Commission told the Amex, CBOE, Pacific Exchange and PHLX exchange in February that it wanted to extend National Market System principles to the options industry.

"We like linkage," says Bart Liang, who is Paul's son and who helps run the Chicago-based

PBL Partners

business of leasing exchange seats back to members. Linking exchanges "brings competition, and even if people think that makes seats obsolete, whether you have an open-outcry system, or a terminal, you still need the membership to trade."