Nasdaq slips up in war of exchanging places

Plans by the London Stock Exchange (LSE) to merge with the Nasdaq stock market are being jeopardised by major threats to the once-proud technology-based exchange.

Nasdaq is losing a significant portion of its business to small rival exchanges set up across the US to trade Nasdaq stocks on better terms. It is also suffering from a general collapse in trading by private investors.

The raft of problems for the New York-based exchange coincides with its alleged efforts to pull off a merger deal with the LSE, which would create the world's largest equity market.

Those plans were dealt another blow last week when Deutsche Börse said it would consider making its own bid for the LSE, if the two came out and announced the deal. The German exchange has been raising money to fund acquisitions.

But recent difficulties on Nasdaq may have caused LSE shareholders to think twice about the logic of a deal with the US exchange. The Composite Index, which tracks the performance of Nasdaq stocks, is down more than 65 per cent since its peak in March 2000, and is leading the world's big indices in losses sustained this year.

In a further blow to its status, Nasdaq recently made the decision to move from its Wall Street offices to an address in mid-town Manhattan.

Nasdaq's biggest challenge is to hang on to its domestic market, which means it is fighting a losing battle. Nasdaq's revenues come from trading fees and the sale of market information, and both of these revenues are caught up in a vicious price war.

The US market is filled with a growing number of electronic share-trading systems (ECNs) which allow customers to trade Nasdaq stocks, but are fiercely competitive on trading fees and pricing spreads. Between them, ECNs now account for 37 per cent of Nasdaq trading volumes.

Nasdaq has long been concerned by the rapid rise of the ECNs, and particularly by the soaring fortunes of the leading company, Island. In an effort to rob Nasdaq of more fees, Island recently started publishing its trades on the Cincinnati stock exchange.

That precedent has since persuaded Archipelago, a rival ECN, to pull off a similar deal with the Pacific Stock Exchange. Others are mulling deals with America's many local exchanges.

Instinet, an information-based ECN that has been operating since 1969, could pose yet another massive threat to Nasdaq if, as many speculate, it joins forces with Island to create a combined provider of Nasdaq information and stock trading. As evidenced by its recently published results, the bursting of the dot-com bubble has caused Nasdaq long-term pain.

More than 700 companies have been de-listed since the end of 2000 – many through defections to the New York Stock Exchange – and trading volumes in hundreds of the remaining 3,990 stocks have become negligible.