Boston Stock Exchange to launch new electronic stock exchange

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Banks to form electronic exchange
Another alternative to consolidating equity markets
By David Weidner, MarketWatch
Last Update: 1:22 PM ET Aug. 24, 2005

NEW YORK (MarketWatch) - A group of financial firms led by The Boston Stock Exchange on Wednesday said they will launch an electronic stock exchange that will be fully operational by 2006.

Citigroup (C: news, chart, profile) , Credit Suisse First Boston, Fidelity Brokerage Co. and Lehman Bros. (LEH: news, chart, profile) will be primary investors in the joint venture to be called the Boston Equities Exchange. Financial terms were not disclosed.

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August 25, 2005 -- Another New York-Boston rivalry is in the works, but this time the battle will be on the trading floor instead of the baseball diamond.

Beantown's Fidelity Investments — long one of the New York Stock Exchange's loudest critics — is getting into the act, forming an all electronic competitor to the venerable Big Board.

In a surprise announcement, Fidelity, the world's largest mutual-fund manager, said its brokerage unit would be joining Lehman Brothers, Credit Suisse First Boston and Citigroup to form BSX Group LLC.

The deal will allow the money-losing Boston Stock Exchange — one of the weakest regional exchanges in the U.S. — to compete for major trading action.

The BSE, which handles less than 1 percent of trading volume in NYSE-listed shares, has lost about $1.65 million over the past two years.

The NYSE, which itself made a commitment toward automated trading in April with its merger with Archipelago Holdings Inc., declined to comment on the deal.

For Fidelity — which has made criticism of the NYSE's auction system something of an Olympic sport — the move allows the firm to have oversight and control over the costs associated with its trading activity.

In November 2004, Fidelity submitted a study to the Securities and Exchange Commission concluding that stock orders of under 10,000 shares cost almost 1 percent more to execute on the NYSE than in an electronic environment.

While the terms of the deal were not released, Robert Hegarty, a capital markets analyst at TowerGroup, said they were likely similar to the deal struck recently between the Philadelphia Stock Exchange and several Wall Street giants.

"There's probably an equity infusion to get the systems and personnel in place and then some form of order-flow commitment," said Hegarty.

Regional exchanges were given a new lease on life when the SEC passed a regulation mandating that electronic trades get executed at the best available price.

The rule, which goes into effect next year, was bitterly fought for years by former NYSE boss Dick Grasso, thus preserving the Big Board's specialist system.

"This is a damn good bet for the dealer and the regional [exchanges]," said Seth Merrin, the founder and CEO of Liquidnet, an electronic stock exchange in NYSE-listed names for institutional clients.

Merrin said the dealers are getting in cheap — the Philadelphia exchange was valued at about $90 million — and get a place to get orders executed in less-liquid names quickly and efficiently.

What's more, Merrin predicted that once the regional exchanges were profitable enough, the NYSE or Nasdaq Stock Market would take them over at many times their book value.
 
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