The directors of the Nasdaq and American Stock Exchanges approved an agreement on Wednesday that calls for the merger of the Amex "into the NASD family of companies," the exchanges said.
The National Association of Securities Dealers will pay US$140 million under terms of the proposal, with $110 million to be spent on technology and $30 million to holders of seats on the American Stock Exchange.
The merger will save "hundreds of millions" in costs over the next five years, the two markets said. It still requires a definitive agreement and approval from the Amex membership.
Junius Peake, professor of finance at the University of Northern Colorado, said: "Short-term this does not mean much but long-term it means a lot. The system gets cheaper, and investors will get the benefits as the cost of trading comes down."
"There's still a lot of money to be wrung out of this system as it becomes more efficient," he said.
A merger would combine the younger, high-tech Nasdaq, which is run by the National Association of Securities Dealers, with the venerable but slower moving Amex and create a more formidable competitor to the New York Stock Exchange.
The American Stock Exchange is an "open outcry" auction market where traders yell out offers around a stock-specific market-maker or specialist on a trading floor. Its much-storied beginnings stretch back nearly 150 years to when brokers started trading securities on a curbside in lower Manhattan.
By contrast, Nasdaq allows competing market-makers to display prices on computer screens with no need for a central trading floor.
Founded 27 years ago, it has managed to shoot past the Amex in terms of new listings, with 5,466 companies worth $1.9 trillion listed at the end of 1997, including high-tech heavyweights Microsoft Corp. and Intel Corp. The market value of the 783 companies on Amex was $168 billion.
The NYSE, the world's biggest stock market, listed 3,044 companies worth $11.8 trillion.
Beyond stocks, the merger is a way for the NASD to get a leg into the lucrative options business - the crown jewel of the Amex. Although the Amex has lagged its larger rivals in equities, it has put a lot of muscle into its options business, now second only to the Chicago Board Options Exchange.
Because of the vaunted status of the options business, many Amex options traders were a lot less nervous about possible layoffs than their stock-trader colleagues.
"People are worried, mostly because we just don't know the details yet," said Rory Bellows an options trader with Crusty Trading, who has worked at the Amex for two years.
"I'm an options trader, and we're not nearly as nervous" about losing our jobs in the merger, he said.
Analysts said the merger would also help polish up the Nasdaq's image after a 1996 investigation of whether brokers were bilking investors by keeping wide "spreads" between the prices at which they bought and sold stocks.
Securities and Exchange Commission Chairman Arthur Levitt said the SEC and the Justice Department would review any proposed deal. He said Justice would mind antitrust issues, while the SEC would want to make sure the deal "increases competition in a way that [is best] for American investors and America's capital markets."
Testifying before a House appropriations subpanel, Levitt said there may be similar mergers on the horizon.
