An influential group of small brokerage firms is withdrawing its support for


proposed IPO after learning the Nasdaq considered merging with the

New York Stock Exchange


Meantime, the

National Association of Securities Dealers

, which oversees Nasdaq, confirmed Friday morning that the

Big Board

had approached it recently with a proposal to merge the two exchanges. But the NASD sent its esteemed neighbor packing.

"We did receive a recent overture from the New York Stock Exchange," an NASD official says. "Our board considered it and rejected it." An NYSE spokesman wouldn't respond directly to that assertion.

Friday morning

reported the NASD had rejected a Big Board overture.

Will to Power


Independent Broker Dealer Association

has concerns that extend beyond the merger talk, say people close to the group. The IBDA, which only recently warmed to the idea of supporting a Nasdaq sale, worries that any merger would further dilute the say its members have over the exchange's operations.

The IBDA, which represents about 200 smaller NASD member firms but carries political sway far beyond its numbers, also felt snubbed by being left out of recent high-profile discussions involving Congress, federal regulators and the exchanges on restructuring the markets.

The group is upset at recent talk of establishing a single regulatory agency to oversee Nasdaq and the NYSE, a concept some of its members stridently oppose, says Bill Singer, the group's general counsel.

'Divisive Chapter'

The IBDA's decision to drop its support for the Nasdaq sale is a significant about-face from its effusive endorsement of the plan in January. And it comes at an inopportune time for the NASD, just weeks before it was scheduled to put the matter before its 5,500 members for a vote.

"The dam just broke," Singer says. "This is going to be a very divisive chapter. From here on out there's going to be very little room for compromise. This is going to be brass knuckles."

NASD officials Friday morning said they were unaware of and surprised by the independent broker-dealers' group's sudden flip in posture on the Nasdaq sale.

An NASD spokesman says concerns the group voiced appear baseless since there are no current talks on a possible merger with the NYSE, and no talks of setting up a single regulatory agency to oversee the two exchanges.

But the spokesman says the NASD hadn't spoken to officials with the small broker-dealers group about their newfound opposition to the Nasdaq sale.

Having Their Say

The group, and its President Alan Davidson, harshly criticized Nasdaq's sale plan late last year, saying it didn't give enough say in the outcome to the smaller securities firms that make up 90% of NASD membership.

Davidson and NASD Chairman Frank Zarb reached an agreement in January that would give all NASD members the opportunity to vote on the sale. Davidson became an ebullient supporter of the plan and he and Zarb put on a public show of harmony.

The spokesman says the NASD plans to mail proxies to NASD members in coming weeks and move forward with the sale. As structured, the deal would be a private placement that would take place in two stages, giving smaller firms a 25% ownership in Nasdaq.

The overall plan would convert Nasdaq into a for-profit exchange, and the sale is technically known as a demutualization.

No Means No

Davidson, president of

Zeus Securities

and a member of the NASD's board, now is planning to write members of the small broker-dealer group and urge them to vote no on the demutualization, Singer says.

The group believed it should have been involved earlier this week when the heads of several top Wall Street investment banks, Zarb and NYSE Chairman Richard Grasso were testified before the

Senate Banking Committee

in New York on the future of the U.S. markets.

And even more troubling, Singer says, was news that the NASD has considered merging with the NYSE, as first reported in Friday's editions of

The Wall Street Journal


"The independent firms that comprise 90% of the NASD don't have membership on the New York Stock Exchange," Singer says.

The concept of a single regulatory agency to oversee activities of NASD and the NYSE is equally problematic, he says. Currently the exchanges police themselves, acting as self-regulatory organizations, or SROs.

Joining that function into a single SRO would be untenable if the NYSE and the NASD were combined, creating a competitor to smaller upstart electronic exchanges, or ECNs, Singer said.

"We're not comfortable with them being our regulators and our competitors," he says.

Singer stressed what he viewed as the significance of the small broker-dealers backing away from the Nasdaq sale now. "This is equivalent to an earthquake," he says.