Even before negotiations between the
Philadelphia Stock Exchange
publicly went bad, there was uncertainty that a deal would be consummated.
But thrown into a rapidly changing market and squeezed by two federal investigations into alleged anticompetitive practices in the industry, the deal's death -- much like the once-planned merger of the
Chicago Board Options Exchange
-- seemed almost certain.
Even inside the almost yearlong negotiations, doubt about the Amex-Philly deal was apparent. "The merger would be a reach for us," said Philly Chairman Meyer "Sandy" Frucher in an interview Monday. "We're still trying to work out what it is each of us could offer the other."
So Thursday's announcement that the deal was off closed the coffin on the deal. The two sides only said a combination wasn't feasible, but they would work on an interim technology agreement.
The Philly floor was nonplussed. "What with the excitement about the
earnings, no one's been talking about the merger ending," says Michael Gaudioso, associate director at
Susquehanna Investment Group
on the floor of the PHLX.
"It was kind of a nonevent. Given the fact that it took so long to happen, everyone got the feeling it was already discounted," he adds. "Basically, the merger option expired worthless."
Outsiders had a similar take. "I think the Nasdaq was trying to figure out why it made sense. The Philly wasn't bringing all that much to the table," says New York securities attorney Bill Singer, who had filed with the
Securities and Exchange Commission
his opposition to the Nasdaq-Amex and Amex-Philly mergers. "Economically, it doesn't make much sense. Why have another
Now, the speculation will turn to whether the Philly can survive as an independent entity.
"That's the question on our minds," says Michael Schwartz,
senior options strategist and the head of the
Committee on Options Proposals
, adding that the exchange's best hope is an SEC-mandated best bid or offer linkage among the nation's four options exchanges. If plans for that system don't come to life in the near future, the Philly membership "may be trading on the deck of the Titanic. The linkage may be the only scenario under which they have a chance," he says. (A Philly spokeswoman wouldn't comment on future plans.)
Such a system would automatically route options orders to the best market for execution and essentially level the playing field among the four exchanges. Order flow would be based less on relationships between upstairs traders (those as major brokerage firms) and individual crowds at each exchange and more on simply the publicly posted options prices.
The SEC has floated the linkage idea in the past, but cost concerns kept exchanges at arm's length. At this point, however, options trading technology has evolved enough, according to Schwartz, to potentially cap some of the expenditures for such a system. He says, in the past, cost estimates ran as high as $23 million for a linked system, but "now a lot of those elements are already in place, so it may not cost as much as originally expected."
On the CBOE's Retail Automated Execution System, for instance, an order routed to the system will get kicked out if a better market exists on another options exchange. The CBOE crowd has the chance to better its current market or let the order go to the other exchange.
While the Philadelphia exchange has upgraded its technology and leased some from the American Stock Exchange for use in trading
, its most active option, it is still seen as vulnerable to a raid on its listings by competitors. That raid may come as soon as two weeks or may wait until early 2000, when the electronic
International Securities Exchange
is launched. (Many key options, such as Dell, are listed only on one exchange.)
"If it doesn't keep Amex technology, there will be immediate multiple listing of Dell," Schwartz says.
The Philadelphia, however, may have some value as a link for an overseas exchange or a shell for an electronic communications network, which matches buyers with sellers, that is trying to achieve exchange status, according to some industry professionals. "It's a lot quicker and easier to back an ECN into that shell," says Singer, the attorney. There have also been talks of a linkage with a European exchange.
The Philadelphia seat market hasn't reflected much optimism on the exchange's future. The most recent sale of a seat on the PHLX fetched $220,000 April 21, according to an exchange spokeswoman. The peak price for a Philly seat was $305,000, an amount paid on April 22, 1998.