The National Association of Securities
Dealers took a historic step on Tuesday by deciding to sell the
Nasdaq stock market to raise $1 billion to help fight off
rapidly growing competition from electronic network rivals.
The NASD board unanimously approved a radical overhaul that
will lead to the private sale of up to 79 percent of the No. 2.
U.S. stock market to NASD member firms, the biggest
Nasdaq-listed companies and some major institutional investors,
NASD officials said.
The move on the part of the NASD, a nonprofit organization
for stockbrokers whose roots date back to the 1930s, marks the
first time a U.S. stock market is being offered to investors and
spun off from its parent body.
The idea is that the private placement would disentangle the
for-profit Nasdaq from the NASD, and its regulatory arm, NASD
Regulation Inc., or NASDR. Free from its status as a subsidiary
of the NASD, the Nasdaq would be more nimble and better able to
raise money and to compete in a fast-changing U.S. securities
industry, NASD executives said.
"Today's board actions are a win-win-win for investors,
issuers and NASD members," NASD Chairman Frank Zarb said.
"Investors and issuers get a more agile, better capitalized
Nasdaq, one that can be quicker to put technology to use and
better able to create the digital stock market."
Also, as part of the deal, the largest 130 companies whose
shares trade on the Nasdaq such as Microsoft Corp. and
Dell Computer Corp. will be able to buy stakes in the
By the end of the private placement's second phase, the NASD
would only be left with about 22-percent of the Nasdaq. Whether
the private placement is a precursor to a public offering is
still uncertain with that decision left up to the new Nasdaq
board, Zarb said.
Stock exchanges are traditionally the property of
individuals or brokerage firms that own their seats and,
consequently, the right to do business in that market.
But with the advent of Internet-based stock trading
technology and upstart private trading networks, the Nasdaq and
the New York Stock Exchange are being forced to reinvent
themselves. The Nasdaq especially faces stiff competition from
private trading networks, known as electronic communication
networks, or ECNs, such as Reuters Group Plc's Instinet
ECNs, computer systems that match share orders placed by a
network of brokers, now account for close to 30 percent of the
daily share volume in Nasdaq stocks.
"This is a competitive response to our presence," said
Cameron Smith, general counsel of Island, the No. 2 U.S. ECN.
"They are finding that their corporate governance can't act
quickly enough to react to the competition."
The NASD's roughly 5,600 members will be able to vote on the
private placement in February. The board needs a thumbs-up from
the majority of NASD's members.
Without that approval, the NASD's management may have to
hold a second vote and revisit its plan, an NASD official said.
It is unclear whether a rejection from the membership would
derail the board's plan.
NASD members range from Merrill Lynch & Co., the No. 1 U.S.,
brokerage firm to small local brokerage firms and individuals
who trade their own accounts. They, along with the bigger
Nasdaq-listed companies, would be offered 47 to 49 percent of
the Nasdaq during the first phase of the private placement. The
NASD will sell off an additional 30 percent in the second stage.
Investment bank J.P. Morgan, who have been hired as NASD's
financial adviser, will put a value on the Nasdaq shares, the
NASD said. A second adviser Salomon Smith Barney, the brokerage
unit of Citigroup, will review J.P. Morgan's analysis.
The Nasdaq's top so-called market participants brokerage
or stock trading firms that generate the highest percent of
trading fees will be offered 30 to 32 percent of the stock
market, the plan stipulates.
The NASD's remaining members can buy up to 25 percent, while
some 16.5 percent will be proffered to Nasdaq-listed companies
and 5.5 percent will be offered to major institutional
"We have come up with a plan that covers a much broader
constituency than we had originally planned, said Frank Baxter,
the chief executive of brokerage firm Jeffries Group who headed
the NASD committee assigned to explore the idea of a spin-off.
"We are now including everyone."
The NASD's preliminary plan, which the board approved on
Dec. 10, met with opposition from the Independent Broker-Dealer
Association, a group that represents the smaller NASD members.
Alan Davidson, the association's president on Tuesday,
however, said the latest proposal treated all NASD members
"No one gets 100 percent of what they want," said
Davidson, also a NASD board member, "what I did get was fair
treatment and reasonableness. This is a document I can
Out of the $1 billion generated from the private placement,
the NASD said it would earmark $500 million to support NASDR,
the NASD's regulatory arm. Some $215 million would go toward
maintaining the American Stock Exchange, an NASD subsidiary,
while $114 million would be set aside to cut Nasdaq's membership
The U.S. Securities and Exchange Commission would need to
sanction the NASD's restructuring when the Nasdaq applies to the
agency to become a full-fledged stock exchange. The NASD plans
to apply for such a ruling in the next month.
Though second only in size to the New York Stock Exchange,
the Nasdaq has never enjoyed exchange status. It has, however,
mushroomed in size, since its creation in 1971 and overshadows
the nation's regional exchanges. The Nasdaq also became the
market of choice for leading U.S. technology companies to list