Death to Middlemen
Sloan, Allan, Kaufman, Leslie, Newsweek
Forget the hype. The proposed combination of the Amex and Nasdaq is about cutting costs.
If we treated business-war casualties the same way we treat the casualties of shooting wars, someone would be out there building the Tomb of the Unknown Middleman. Middlemen have been mowed down by the myriads the past few years, as buyers and sellers have increasingly begun dealing with each other directly. Many of the surviving middlemen have had their incomes gravely wounded. Wal-Mart, to pick one example, wants to buy directly from manufacturers rather than dealing with distributors or brokers. The insurance companies and government agencies and employers that pay much of the nation's prescription-drug bill have used their muscle to cut neighborhood pharmacies' profits on such prescriptions to almost nothing. Travelers can make their own airline and hotel reservations online, cutting out travel agents. And so it goes.
Last week the war on middlemen, usually fought quietly in the shadows, emerged in full public view on Wall Street. Squeezing the middleman is the major motivation behind the proposed combination of the National Association of Securities Dealers, the parent company of the Nasdaq Stock Market, with the American Stock Exchange. (News of the talks was leaked last Wednesday by NASD forces, according to various sources, but an NASD spokesman denies leaking the news or having it leaked.) Add to cost-cutting a soupcon of promotion--the cinematically challenged Nasdaq market, which has no central location, would love to use the Amex's New York City trading floor to stage photo ops and stimulate TV coverage, a la the New York Stock Exchange--and you pretty much understand what's actually going on here.
The proposed combination won't make a noticeable change in the lives or stock portfolios of most Americans, but it's an interesting piece of sociology. Nasdaq, the self-styled "Stock Exchange for the Next Hundred Years," meets the Amex, a.k.a. the Curb, the exchange of the Flapper Era.
Folks from Nasdaq and the Amex talked last week about wanting to combine forces to become a more formidable competitor to the New York exchange. That's true. But by far the biggest reason for the proposed combination is cost-cutting. Big, active traders like mutual funds want the exchanges to get costs down so they can buy and sell more cheaply than they do now. If you're an individual investor buying Microsoft shares that you intend to hold for 10 years, it doesn't much matter if you pay 82 1/4 a share or 82 3/8. But if you want to hold the stock for 10 days--or 10 minutes--the extra eighth of a point makes a huge difference. As it does if you're a mutual-fund manager comparing your return with what other funds are making.
Last week's news is a continuation of a long-term trend of having securities buyers and sellers meet each other directly, or at the very least of getting brokers to take a smaller cut. East summer you may have noticed peculiar fractions like 128ths and 256ths of a dollar creeping into stock-price tables. No, it didn't happen because some smart aleck was trying to see how small type can get before becoming totally unreadable. It's because the Amex, Nasdaq and NYSE, under pressure from regulators and Congress, told members to start quoting prices in 16ths and 32ds of a dollar rather than in the traditional (and more lucrative) eighths of a dollar. The descent to 256ths rapidly followed.
Nasdaq has been especially pressured. Most of its business consists of having dealers buy stock from investors at the bid price and resell it to buyers at the ask price. (By contrast, the New York and American exchanges have specialists who match up buyers with sellers and take a fee for ar ranging the trade.) After revelations that some Nasdaq dealers were conspiring to keep the difference between the asked price and the bid price artificially high, followed by lawsuits and whopping fines, Nasdaq has cleaned up its act somewhat. …