NYSE and NASD mergers: Slow Them Down.

April 25, 2005

I've been reading a lot lately about the mega-mergers proposed for NYSE/ARCA and NASDAQ/INSTINET. Folks are predicting the likely SEC review could take months. Frankly, the SEC's review should take months, but I'm wondering if the federal regulator has learned any lessons from its last major merger review.

Anyone remember how the AMEX/NASD merger got jammed through the NASD membership and the SEC review process in 1998? Dissident NASD and AMEX factions complained about the deal, but no one really listened --- it seemed like there was some secret understanding that the merger would be rushed through. In case you forgot, the SEC's review took about two months. And we all know how much of a disaster that deal turned out to be.

Here's a question. When the merger of NASDAQ/AMEX was announced and the SEC provided for a public comment period, how many written comments were received? Would you be shocked to learn the answer was "one." Read it here: www.sec.gov/rules/sro/nd9867o.htm

We need to insist that the SEC carefully considers the economic and competitive impact of not just the NYSE or the NASD in and of themselves, but also the impact on the economy if both deals proceed.

For starters, what's this nonsense about letting NYSE "spin off" its regulatory arm after the ARCA merger. Nonsense. The SEC MUST take this opportunity to put a bullet in the SRO beast. The NASD and NYSE SROs cannot be allowed to dominate the self-regulatory landscape, especially when such dominance will now likely take on an unseemly competition as the two behemoths battle it out. The SEC must abolish the the present SRO system and establish a single National Private Sector Regulatory Organization (NPSRO),which would regulate through a Board of public investors, registered persons, broker-dealers, financial institutions, and public issuers --- not the scenario presently enjoyed by Wall Street in which all non-Broker/Dealers are essentially disenfranchsed. Bottom line, as even Spitzer pointedly stated: self-regulation is a failure.

Finally, the United Stated Department of Justice/Antitrust Division better look into both mergers with great care. Yeah, the same Antitrust Division that gave the NASD/NASDAQ a slap on the wrist several years ago for what appeared to be a strong case of price fixing the NASDAQ market. Why do we need to get a careful antitrust review? Simple. In the Brave New World of the post-mergers, the remaining regional exchanges and ECNs may well find themselves in the shadows of two huge trees --- and the forest may quickly become deforested in that darkness. Funny, only a few years ago NASD was slamming the same ECN competition it is now gobbling up. Amazing how bad guys become good guys when you can make money from them. Similarly, the NYSE's dedication to the "superior" specialist system seems to have evaporated in the face of using Instinet's electronic system.

A warning to all. We are meddling with primoridal forces on Wall Street and this is no time to rush and no time for amateur hour. When the regulators failed to do a careful inquiry, we wound up with the now-unwound American Stock Exchange/NASD/NASDAQ deal. We need to examine that debacle and draw some important inferences. What went awry on that small scale could be devastating on the large scale of NASDAQ and NYSE. Let's get it right this time.