http://www.nytimes.com/2005/08/16/b...l=1&adxnnlx=1124211619-QK6tNsTR2R5mmE5oX99MPg Wall Street Seeks Stakes in New Spots for Trading By JENNY ANDERSON Published: August 16, 2005 Two deals to secure places to trade stocks and options that could eventually be alternatives to the New York Stock Exchange and the Nasdaq market are expected to be announced soon, with nearly every significant Wall Street bank scrambling to align itself with one or both of the efforts. Morgan Stanley, UBS, Credit Suisse First Boston and Citigroup are expected to announce today that they are joining Merrill Lynch and the Citadel Derivatives Group in buying an equity stake in the Philadelphia Stock Exchange, which trades options and stocks and has the ability to trade futures. At the same time, Fidelity Investments, Lehman Brothers, Credit Suisse First Boston, Citigroup and a Citigroup unit, Lava Trading, are in advanced talks to create an electronic stock trading platform in Boston, which will be structured similarly to the Boston Options Exchange, according to two people briefed on that plan. The two deals appear to be a reaction against the might of the New York Stock Exchange and of Nasdaq. The power of those two markets was magnified earlier this year, when the New York exchange announced a merger with Archipelago, an all-electronic market, and days later Nasdaq agreed to buy another electronic trading platform, Instinet. While the Big Board and Nasdaq have been fierce competitors for years, some of the big Wall Street firms, which account for a huge chunk of the trading sent to these exchanges, bristled at the duopoly being created virtually overnight, fearing that the cost of trading could rise. Financial institutions seek to trade stocks at the best price for their clients. By becoming stakeholders in different trading arenas, they hope to make sure that they have a say in how markets operate. "It's an insurance policy for the future," said Junius W. Peake, a professor of finance at the University of Northern Colorado. "They are keeping an oar in if there needs to be another exchange that does something useful." Representatives for all the firms involved declined to comment yesterday. Notably absent from the efforts to seek alternate trading marketplaces is the investment bank Goldman Sachs, which conceived of the combination of the New York Stock Exchange and Archipelago. Goldman advised both parties on the merger, which caused something of an uproar among competitors. Foremost among their concerns was that Goldman not only owns seats on the New York exchange, but also owns a leading specialist firm on the floor and holds an equity stake in Archipelago. Chief executives at some banks, including Merrill Lynch, expressed dismay that the Big Board would consider such a transformative deal without consulting its major owners and users. Of course, most other Wall Street firms are also owners of seats on the exchange, and a few own specialist firms and or stakes in electronic trading operators or other alternative markets. And the Big Board and Archipelago were fully aware of those potential conflicts, as they hired other banks to render fairness opinions and signed a merger agreement that clearly laid them out. Still, the widespread interest among Wall Street's top trading firms in the Philadelphia exchange and in a new Boston exchange shows how much the trading universe has changed in just a few years. Shares, once bought and sold on the floors of exchanges, are increasingly traded electronically. Exchanges, both national and regional, which were member-owned cooperatives operated as nonprofit entities, are shifting to a profit-making, publicly traded model owned in small or large part by the major users of the exchange. The changes are taking place as trading stocks has become less profitable, while trading options, futures and derivatives is more attractive. Those exchanges that can offer the ability to trade various financial products - and to clear the trades, another profitable piece of the business - are better positioned to be profitable entities as they are transformed. The result of these changes is a group of new public exchanges whose market value and market structure are wholly different from a decade ago. The Chicago Mercantile Exchange went public in December 2002 at $35 a share. Its shares are currently trading around $274. Archipelago and the International Securities Exchange are both publicly traded electronic exchanges. Archipelago deals in stocks and options while the I.S.E. trades stock options. As a result of the pending merger of the New York Stock Exchange and Archipelago, the Big Board is to shift from a member-owned, nonprofit entity to a for-profit, publicly traded company owned by shareholders. In the Philadelphia deal, Morgan Stanley would buy 10 percent of the Philadelphia exchange with an option to buy an additional 10 percent if the market met certain performance goals. UBS, Credit Suisse First Boston and Citigroup would each buy 5 percent with the right to an additional 5 percent. The banks join Merrill Lynch and the Citadel Derivatives Group, a subsidiary of the Citadel Investment Group, which in June each secured the right to buy 20 percent of that exchange, people briefed on the deal said. Philadelphia shifted from a mutually owned nonprofit cooperative to a for-profit company in January 2004. Predominantly an options market, the exchange has gone from a human-based model (where individuals manage trading in a stock by standing in a crowd and negotiating a price) to an electronic model where competing market makers (individuals who buy and sell stock to create prices for potential buyers and sellers) operate electronically and remotely. While the bank's investment in the Philadelphia exchange is economically insignificant - Merrill Lynch and Citadel paid $7.5 million for their initial stakes - it represents an attempt to find a trading alternative. Philadelphia's platform can be appealing for Wall Street as it requires less investment than one that requires that people be present on the floor. The equity transactions also offer the banks ownership stakes in an exchange that could go public as well as the ability for those banks to trade against their own inventories of shares, which is generally more profitable for them. The Philadelphia exchange figured into the N.Y.S.E.-Archipelago deal. Documents released by the exchange related to the merger indicate that both the Big Board and Archipelago were interested in the possibility of buying it before they reached their own merger agreement.