Have you ever heard of the Baltimore Stock Exchange? No? How about the Minneapolis Stock Exchange?

No again?

Well, Baltimore and Minneapolis used to have their own equity exchanges. So did Cleveland, Milwaukee, Seattle, St. Louis and Washington.

In fact, four decades ago, there were 21 stock exchanges in the U.S. Last year at this time, there were eight: the New York Stock Exchange, the American Stock Exchange, Nasdaq, and the remaining regional stock exchanges in Boston, Chicago, Cincinnati, Philadelphia and San Francisco. (The Pacific Exchange maintains its headquarters in San Francisco, but has trading floors in both San Francisco and Los Angeles.)

This year, a flurry of activity spurred by the proposed acquisition in March of the AMEX by the National Association of Securities Dealers, Nasdaq's parent has begun a new consolidation among this country's exchanges.

In June, the Philadelphia Stock Exchange (PHLX) announced its intention to join the merger between the AMEX and the NASD.

The following month, the Pacific Exchange (PCX) entered an agreement with the Chicago Board Options Exchange (CBOE) to merge.

With the PHLX and the PCX both undecided about the future of their equity operations, the list of U.S. stock exchanges may shrink to six, and counting.

A combination of factors chiefly declining profitability and the high cost of technology upgrades amid increased competition for orders have led the regionals to dramatically rethink the future of their operations.

"I think we're still in the middle of this period of consolidation," said Warren Langley, president of the PCX. "The regionals are going to have to gain a critical mass to compete with the other exchanges, the third market, electronic trading. The size of that critical mass is growing, and to go it alone is going to be very difficult."

Langley admitted that the PCX had been looking for a partner for almost a year, but did not engage in serious discussions with the CBOE until early this summer.

He said the AMEX's merger with the NASD and the rumors of further consolidation that ensued intensified the PCX's search for a partner.

Thomas F. Ryan Jr., president of the AMEX, admitted the NASD and AMEX announcement was likely a catalyst for much of the merger talks among U.S. equity exchanges.

Indeed, David Colker, chief executive of the Cincinnati Stock Exchange (CSE), said the proposed $200 million technology investment in the AMEX has forced his exchange to look for a possible partner.

"The NASD merger with the AMEX set about a lot of rethinking in the industry," Colker added. "The AMEX is committed to expanding electronic trading, which will make it more cost-effective. That is what's pushing us. We need to make sure we stay efficient and competitive."

Colker said the CSE at the urging of its members and broker dealers is currently looking at a number of opportunities.

Separately, Boston Stock Exchange (BSE) Chairman and Chief Executive William G. Morton Jr. said the BSE has been involved in serious merger talks with the CSE.

"Truthfully, we've had ongoing discussions about the future with some of the other exchanges," Morton said. "But we've been particularly involved with the CSE. So far, they've only been discussions. Nothing concrete yet."

Morton added that BSE management has stressed the importance of aligning with a larger organization to have more capital available for technology investments.

The BSE and the CSE have been projected as likely partners because of the similarity of their trading structures.

Although the BSE still has a trading floor in contrast to the all-electronic CSE both regionals permit multiple specialists on a single stock, similar to how Nasdaq works.

"Aside from the competing specialists on both the BSE and the CSE, the two exchanges have concentrated on the business of trading equities," Morton said. "We don't get into the other businesses some of the other exchanges have gotten into. That's what keeps costs down."

Lagging Behind

Ryan said the AMEX's merger with the NASD and the consolidation among exchanges that ensued will eventually strengthen competition.

"By and large, stock exchanges have never voluntarily made changes in business," he added. "They just went out of business. Our agreement with the NASD is the first real strategic merger to position for the future of listed trading. Although consolidation will create fewer competitors, it will make stronger competitors."

It's fitting that the AMEX may be driving much of the consolidation among U.S. stock exchanges. Perhaps no other exchange has suffered from such a severe decline in market share as the AMEX has in recent years.

Once the nation's number two exchange behind the NYSE, the AMEX has lagged behind both Nasdaq and the NYSE recently the other two primary markets.

The primary markets the NYSE, Nasdaq and the AMEX issue and list new stocks. The secondary markets, or regionals, compete with the primary markets for order flow once stocks have been issued.

In 1990, the AMEX had an average daily equity volume of 13.12 million shares. This past August, the AMEX average daily equity volume had grown to only 32.69 million shares.

While volume has more than doubled in the last eight years, the AMEX has been dwarfed by both Nasdaq and the NYSE.

Nasdaq had an average daily volume of almost 131.94 million shares in 1990. And Nasdaq has boomed in the last eight years. By this August, average daily volume had grown to more than 749.81 million shares.

Like Nasdaq, the Big Board has also seen stunning growth over the last eight years. In 1990, the NYSE had an average daily volume of 213.3 million shares. Through August 31, the NYSE had an average daily volume of 636.5 million shares this year.

When it agreed to merge with the NASD in March, the AMEX had only 783 listings, valued at $200 billion dollars. Nasdaq had 5,487 listings at the time of the merger, valued at $1.8 trillion dollars, and the NYSE had 3,044 listings, valued at $9.4 trillion.

Even the Chicago Stock Exchange (CHX) has surpassed the AMEX in trade volume recently.

The CHX lists more than 4,000 equity issues, almost all of which are primarily traded on the NYSE, Nasdaq and the AMEX. The CHX had an average daily volume of 37 million shares in August, outpacing the 32.69 million shares at the AMEX.

Improving Technology

So how will the NASD improve business at the AMEX?

With business growing at a relatively slow rate, Ryan said the AMEX did not have the resources to make the technology investment necessary to lower its cost structure and improve its equity business.

"We were aware that over the long run, we needed to make a major investment in our technology to remain competitive," Ryan said. "We couldn't make that commitment alone. Improving technology was the big driver in our merger."

Part of its proposed agreement is the NASD's promise to invest $200 million in a technology upgrade for the AMEX.

Ryan said the technology upgrade will not change the AMEX's specialist-based trading environment. Rather, the technology will improve the routing and execution of orders on the AMEX floor.

He added that paramount to the upgrade will be the creation of a new electronic equity book for the AMEX. The proposed new book will electronically execute small orders on the floor of the AMEX, and offer transparency beyond the quoted market. The book will also make the AMEX more efficient, Ryan said, by eliminating floor interaction and brokerage commissions for orders on the book.

The AMEX equity book will be loosely modeled on the NYSE's DOT systems.

Lowering Costs

David Whitcomb, a finance professor at Rutgers University and founder of Charleston-based day-trading firm Automated Trading Desk, said the regionals are looking to improve technology to lower their cost structures. By lowering their cost structures, he added, the regionals may be able to remain competitive despite declining profitability.

"The core business at the regionals has been disappearing," Whitcomb said. "A lot of retail order flow is going to the third market, or is being executed electronically. Plus, reducing trading increments to sixteenths has made business less profitable."

Whitcomb added that reduced spreads with smaller increments diminished the profits regionals had traditionally reaped from purchased order flow.

Robert Jennings, a finance professor at Indiana University, said broad changes across Wall Street have also affected business at the regionals. Chief among those changes have been improvements in technology and mergers among financial-services companies.

"On Wall Street in general, we've seen leaps in technology, huge economies of scale and consolidations of order flow," Jennings said. "The exchanges are having to merge to keep up with the Wall Street firms. The only way to survive as an exchange is to be a low-cost provider."

The CHX has been devoted to lowering costs in recent years. Robert H. Forney, president and chief executive of the CHX, attributes cost cutting and improved operations to record growth on the exchange.

In 1997, trade volume on the CHX set an exchange record, reaching 10.01 million trades. Through the end of August, trade volume on the CHX in 1998 was up 65 percent from the same eight-month period last year to 10.08 million trades. Through August, the CHX had traded 5.47 billion shares this year.

"We're keeping our mind open to potential partners out there," Forney said. "But mergers must align with our objectives. We have shaped ourselves into a low-cost structure. Most potential mergers would raise our cost structure, and that's opposite our objectives."

Two years ago, the CHX shed its trust and clearing company and a software division developing systems for foreign markets. By dropping its subsidiary businesses, the CHX workforce was slashed from more than 500 employees in early 1996 to 185 today.

The cost cutting has allowed the CHX to lower its average cost per trade from $4.76 in June of 1996 to $2.70 per trade this June.

With a lower cost structure, and an overhaul of its trading systems, the CHX was able to boost revenues from operations to $21.17 million for the first six months of 1998, an increase of 23 percent from the same period last year.

"We have a very dynamic environment in place now," Forney said. "We've made ourselves into a major player."

Forney cited high operating costs as driving forces in the recent mergers of equity exchanges.

Although it traded almost half the number of stocks, Forney said the PCX had more employees than the CHX. And PCX daily equity volume is significantly lower than CHX volume. Add that to the operating costs of maintaining two trading floors for the PCX, and profitability suffers significantly.

Forney also saw similar operating problems at the AMEX.

"The AMEX had an operating budget double or triple our budget, and they traded less stocks and less volume," he added. "The AMEX didn't have efficiency in their equity business. They needed that to compete."

Competitive Threats

Like many regional officials, Forney believes the recent exchange consolidation has also been influenced by options trading. The AMEX, the PCX and the PHLX all have viable options businesses.

"All of the exchange transactions have been centered somewhat around options trading," Forney said. "The PCX and the PHLX decisions were definitely spurred by options alliances. And that was part of the issue for the AMEX and the NASD."

Options the right to buy or sell a security at a prespecified price in exchange for an agreed-upon premium have become popular on Wall Street as a means to hedge risky investments in stocks.

Early last year, there were five options exchanges in the U.S: the AMEX, the CBOE, the NYSE, the PCX and the PHLX. There will soon be two.

Late last year, the CBOE purchased the options business of the NYSE to begin the spate of options mergers.

The PHLX joined the merger between the NASD and the AMEX in June primarily to link its options business with the AMEX.

And the CBOE will soon incorporate the options business of the PCX. Langley said part of the proposed agreement states that a new options trading environment similar to the CBOE's floor in Chicago will be built for the PCX in San Francisco.

Langley added that the CBOE is attempting to sell the PCX's equity operations, but is prepared to integrate equities into the new structure should no suitable buyer be found.

Aside from options, the PCX may have been strengthened by its agreement with Durango, Colo.-based OptiMark Technologies to link OptiMark's trading system to the exchange's equity business.

"OptiMark is what distinguishes our equity business from the other regionals," Langley said. "It's an innovation that could dramatically increase our order flow. It will give our equity business real strength."

That same potential equity strength has been lacking at the PHLX.

Through the end of May, the PCX had 1.7 percent share of trading in NYSE-listed stocks in 1998, trailing only the CHX among regionals. That business will likely increase once OptiMark goes live by year's end.

The PHLX, on the other hand, had fallen to dead last among regionals in trading of Big Board-listed securities, to less than one percent through May of 1998. In 1995, the PHLX traded 1.3 percent of the volume in NYSE stocks.

"Economic pressures at the PHLX had been building for some time," Colker said. "It wasn't sudden. Their options business is what attracted the AMEX and the NASD."

Salvatore F. Sodano, chief financial officer and deputy chief operating officer of the NASD, said the options businesses of the AMEX and the PHLX were important to the NASD's interest in the two exchanges.

"It's very risky to build an options business from scratch," Sodano said. "It was something we lacked, and it was one of the main factors in our interest in both the AMEX and the PHLX."

According to Sodano, the NASD will soon trumpet its newly-acquired options business in a large advertising campaign directed at both Wall Street and Main Street.

"The NASD will provide investors the ability to trade stocks and options, and we want them to know that," Sodano said. "With the equity business at the AMEX, we'll also provide companies with the choice of listing their stock in a dealer environment or a floor-based listed environment."

The AMEX's Ryan admitted the NASD and the AMEX have not fully considered what to do with the PHLX's equity business. He added that the PHLX's equity business may eventually be rolled into the AMEX's equity operations.

But Ryan said that the NASD has been adamant in its desire to maintain and enhance the equity operations at the AMEX.

"Nasdaq and the NASD have a growing prestige, and the order handling rules, the proposed limit-order book and stronger listed companies are making investors more comfortable," Ryan added. "By adding the recognized name of the AMEX, and our equity and options businesses, we're positioning to challenge the NYSE as the world's premier market."

Despite its responsibilities as a regulator, the Securities and Exchange Commission has been decidedly closemouthed about the recent consolidation among stock exchanges.

According to an official in the public-affairs office of the SEC, the SEC's Division of Market Regulation is very hesitant to prejudge the current consolidation, and strongly refuses to comment on the matter.

The SEC released only this statement dated March 13 from Richard Lindsey, director of the SEC's Division of Market Regulation, after the announced merger of the National Association of Securities Dealers with the American Stock Exchange:

"Recently, we were appraised by the NASD and the AMEX of their ongoing discussions. The SEC, however, does not approve or disapprove of mergers between markets, exchanges and firms. To the extent that rule changes and new governance rules result from a new relationship between the NASD and the AMEX, the [SEC] would seek public comment and review the proposed changes once those changes are presented to the [SEC]. We are typically supportive of efforts by the exchanges and markets that promote competition and educate and protect investors."

Traditionally, U.S. stock exchanges competed for listings. The New York Stock Exchange and the American Stock Exchange listed large national companies. The regional stock exchanges supported small local companies.

But companies began to turn to the NYSE and the AMEX for trading, and the regionals were forced to consolidate amid declining profitability. Four decades ago, there were 21 stock exchanges in the U.S. Last year there were eight.

In 1971, the National Association of Securities Dealers launched Nasdaq, a floorless, multiple market-maker system that attracted small-cap listings.

To survive, the regionals began to trade stocks primarily listed on the NYSE and the AMEX, linked to the primary markets by the Intermarket Trading System.

Paying for order flow, the regionals have been able to attract retail orders away from the primary markets. And the NYSE's so-called Rule 390 has provided regionals with a steady flow of block orders.

With technology speeding the growth of electronic trading, the regionals are consolidating into lower-cost structures. The NASD with Nasdaq and its proposed partnership with the AMEX is set to compete with the NYSE. With foreign companies looking to the U.S. for exposure, the NYSE and Nasdaq are positioning to accommodate foreign listings and growth overseas.

New York Stock Exchange

The NYSE is, quite simply, the world's premier exchange. The 206-year-old, floor-based auction market is the home of 3,104 companies listing 3,749 issues. The Big Board averages 652.3 million shares each day, and has 1,366 seats. The last seat sold on September 22 for $1.18 million.

Nasdaq

Nasdaq was launched in 1971 by the NASD. Traditionally, Nasdaq issued small-cap stocks in its floorless, multiple market-maker environment. But as the exchange has grown, its own blue-chip listings offer competition for the NYSE. Nasdaq lists 5,984 issues, and had an average daily volume of 749.82 million shares in August.

American Stock Exchange

The AMEX lists 781 companies and averaged 32.69 million shares daily in August. Aside from offering equities in a floor-based environment, the AMEX has a viable options business, trading 371,667 contracts in August. There are 661 regular seat members, and 203 seats for options only. The last regular seat sold in September for $405,000. With its agreement to merge with the NASD, the AMEX will likely undergo major changes.

Boston Stock Exchange

Averaging nearly 10.3 million shares a day in 1998, the BSE will move its operations to a new, state-of-the-art trading floor in 1999. Founded in 1834, the BSE has 203 seats, and trades more than 2,000 issues. The last seat sold on July 27 for $25,000.

Chicago Stock Exchange

Founded in 1882, the former Midwest Stock Exchange primarily trades NYSE, Nasdaq and AMEX-listed securities. The 185-employee CHX has 445 seats and 4,092 listings. In August, average daily volume was 37 million shares. The most recent sale of a CHX seat on August 31 made $45,000.

Cincinnati Stock Exchange

The CSE doesn't have a trading floor, and isn't located in Cincinnati. The electronic exchange, founded in 1885, moved its headquarters from Cincinnati to Chicago in 1991. Along with the BSE, the CSE is the only regional that allows multiple specialists on a single stock. The CSE averages roughly 7.5 million shares a day, and lists close to 600 issues. The CSE has 237 seats, the last selling for $7,500.

Pacific Exchange

The PCX is the only U.S. exchange operating two floors, in Los Angeles and San Francisco. Founded in 1882, the PCX has 552 seats and 2,700 equity issues. It also trades 785 options. The most recent seat sale on September 28 went for $365,000. The PCX had an average daily equity volume of 14 million shares in August, and a daily options volume of 228,000 contracts. It was the options business that attracted the Chicago Board Options Exchange as a partner.

Philadelphia Stock Exchange

The PHLX is the nation's oldest stock exchange, founded in 1790. The 505-seat exchange trades 2,600 equity issues and 800 options. In August, the PHLX had an average daily equity volume of 6.62 million shares, and a daily options volume of 147,718 contracts. The PHLX entered an agreement to merge with the American Stock Exchange and the National Association of Securities Dealers in June. The last PHLX seat fetched $200,000.

Nasdaq will learn next year just how well an Internet-based market-making trading system performs.

Several Nasdaq trading desks are among the guinea pigs for a pilot program aimed at testing the reliability and security of the Internet-based successor to Nasdaq's Level II workstation. And the results of the pilot will be watched with anticipation, if not bated breath.

"The Internet is going to be the highway of the markets of the future," said Gregor Bailar, chief information officer of the National Association of Securities Dealers, Nasdaq's parent.

"We see it as an enabler and a catalyst, which helps create a more liquid and a more efficient market," he added.

Nasdaq declined to identify the participants in the pilot, though it said market makers and others will be involved. "It is limited to a small group," a spokesman for Nasdaq said. "Our goal is to implement the pilot by the middle or the end of next year."

If the results of the pilot are encouraging, Nasdaq may never be the same again.

The machinery for market making on the world's largest intranet (or extranet, as others describe it) would no longer include an expensive proprietary network. Rather, it would be replaced by the World Wide Web and 6,000 PCs, instead of 6,000 trading terminals.

Today's proprietary network is vast, encompassing Unisys 4800 mainframe-based computers for stock quotes, and clusters of Tandem Himalaya K20,000 computers running Nasdaq's transactional systems, including SOES and SelectNet.

Most importantly, market makers would welcome the Internet's potential to drive transaction costs down on each trade executed on Nasdaq.

Driving down costs, in fact, may be the most important goal for Nasdaq as the new millenium nears.

Undoubtedly, it could make Nasdaq the most efficient and lowest-cost equity market in the world, at least until competitors catch up, analysts suggest.

Transaction costs could be reduced by an estimated 50 percent. Not surprisingly, doing so is a favorite theme of Nasdaq President Alfred Berkeley.

"We strongly believe that the future belongs to the market that is the low-cost provider," trumpeted Berkeley in a speech before professionals last year at an equity-trading conference sponsored by New York's Baruch College.

"In other words," he added, "markets will follow costs. They have in every other market, and they will in ours."

Berkeley's ascension to the top post at Nasdaq in June 1996 was no surprise, given his background as an analyst in electronic commerce and software development when he was a managing director at Baltimore-based Alex. Brown & Sons, the predecessor firm of BT Alex. Brown & Sons.

Some Doubts

While some analysts doubt that Nasdaq will move market making onto the Internet anytime soon, the electronic dealer market has nonetheless shown what can be done in other areas.

In 1998, Nasdaq will spend more than $14 million developing its current sites, twice as much as it did in 1997. (Overall, Nasdaq has earmarked $600 million over five years for the expansion of its network.)

Berkeley is adamant that Nasdaq must move the entire marketplace onto the Internet to remain a viable entity. His view is that Nasdaq's technology curve has peaked. No matter how much more is invested, performance will not improve appreciably.

"The technology curve that Nasdaq is part of derives from the 1960s, when Dartmouth University came up with computer time-sharing, which allows multiple users onto the same computer," Berkeley explained in his New York speech.

"Guess what?" he added. "We have pushed the existing technology curve as far as it will go, and a new technology curve is on the horizon. It is as threatening to Nasdaq's trading technology as our technology was to its predecessor."

Three Steps

Nasdaq has outlined three steps that will bring it completely onto the Internet.

The first step is already taking place putting quotes on the Internet on a 15-minute delayed basis. Nasdaq's site, www.nasdaq.com, is attracting more than 20 million hits daily, most of them for stock quotes.

In addition to a site for investors in the U.K. at www.nasdaqonline.com, Nasdaq has a site customized for traders, www.nasdaqtrader.com, which features technical and regulatory information.

Early next year, Nasdaq will launch a subscription-based enhanced service on www.nasdaqtrader.com. The premium service is being tested by Nasdaq.

The second step involves order-entry functions on the Internet. There are more than 70 companies now gathering stock orders on the web, and that is expected to grow exponentially over the next two years.

Nasdaq is using the Internet to implement its Order Audit Trail System, or OATS, for collecting trade data. Market makers will send that data via secure e-mail, or through the FTP protocol.

"Our efforts to automate OATS on the Internet will only lower the costs of implementation," Bailar said. "After all, the only other option is paper."

Last month, Nasdaq replaced its DOS-based Mutual Fund Quotation System with a browser-based, secure web site, to make it easier for fund managers to submit price information by their daily deadlines. Fund managers have just under two hours from the market's close to calculate their mutual-fund prices and transmit them to Nasdaq.

Previously, fund managers had to manually enter prices for each of the funds. Using the Internet, fund managers can import ASCII files with the prices for several funds. The new system is flexible and speeds up the submission process.

"It gives users the ability to efficiently update and view information on the Internet," Bailar said.

Nasdaq is viewing this mutual-fund service as a preliminary pilot program before it engages in a full-fledged test of a live trading environment next year, which is the third step in Nasdaq's plans actual market making on the Internet.

Much of the infrastructure that will facilitate Nasdaq's move onto the Internet is already in place, of course. Nasdaq trading terminals are connected by a quarter-of-a-million miles of leased network capability run by industry giant MCI Worldcom. The network links data vendors to more than 420,000 information boxes around the world.

The Nasdaq computer hub is in a nondescript 10,000-square-foot facility in Trumbull, Conn. A backup site is housed in Rockville, Md.

But security and reliability, as well as speed of delivery, are major obstacles to be finetuned if Nasdaq is to more fully embrace the Internet.

Reliability, acknowledged Bailar, "will make it a means for efficient communications between the firms and us."

"Nasdaq has a great web site, providing proprietary access to members' content," added Dan Connell, president of Harrison, N.Y.-based ComStock, a provider of Internet-based market data for Nasdaq traders and other professionals. "You hit enter, and you get a response back pretty darn quickly from Nasdaq."

But Connell does not think Nasdaq will switch market making onto the Internet anytime soon. "For a start, keeping it on a real-time environment is not that easy," he said.

But even ComStock and other vendors overcame the reliability and time-sensitivity factors with their own market-data products. Though they are not perfect solutions, they are cheaper than more conventional data-service products. (ComStock on the Internet handled 50,000 trades in August, representing more than 40 million shares.)

The Internet is a pervasive tool of online trading firms, such as the San Francisco-based discounter Charles Schwab & Co. and New York's Datek Online. Roughly 20 percent of stocks are now traded on the Internet, much of that via online brokers.

To be sure, some online discounters have crashed during periods of heavy market volume. But these firms are confident such troubling occurrences will be rare in the future.

Putting Nasdaq Level II workstation on the Internet is attainable by the end of 1999, thinks Kenneth Pasternak, chief executive of leading Nasdaq wholesaler Knight Securities. But to have a full-fledged trading system, it would then be necessary to integrate order-management systems and data-service bureaus via the Internet, he added.

Hard Act

Moving to the Internet, however, does make some market makers squirm. After all, capital and proprietary positions are at stake. Nevermind that Nasdaq's proprietary network is a hard act to follow. Data is transmitted to end users within a nanosecond actually within a 300-millisecond simultaneity throughout the U.S., or practically real time.

Greg Cline, a principal analyst of Internet-architecture research at Newton, Mass.-based Cahners In-Stat Group, said the best solution for Nasdaq would be a guarantee-service contract with a private Internet Protocol, or IP network provider.

"That way, data would be transmitted across a dedicated network instead of over several networks, which causes potential delays and an uneven distribution of data," he said.

The "public" Internet cannot be relied upon yet to distribute data among trading professionals with a guarantee that each will receive the same information almost simultaneously. But Nasdaq is undaunted. "We know that we have to move to the World Wide Web," Berkeley told his New York audience.

When reprimanding subordinates, Richard A. Grasso, the chairman of the New York Stock Exchange, has tried something a tad stronger than a stinging memo or a cutting e-mail, according to people familiar with the chairman of the New York Stock Exchange.

Grasso has dressed down staffers in front of colleagues, uttering sarcastic remarks that are let's say not pretty. The effect is generally stunning, the sources said.

Grasso uses sarcasm like a surgeon using a scalpel without anesthesia. "He's feared by the staff," said one source, who declined to be named.

"Dick is pretty vindictive if you cross him," added another source, who also requested anonymity.

Even so, a hard-nosed attitude may be what's needed to run an institution as large, influential and powerful and with its share of competitive and ego-driven personalities as the Big Board.

A hard-nosed attitude, to be sure, helped Grasso make it to the very top in a cut-throat business. "Dick Grasso is an unassuming-looking Italian without a college degree," said a market veteran and a personal Grasso admirer. "Yet he's also the first person in the history of the exchange to become chairman from the inside. So you've got to recognize that you're dealing with a person with some remarkable properties."

His was no silver-spoon childhood. Home was an apartment in a five-story walkup in a working-class section of Elmhurst, Queens. (Grasso sometimes begins speeches with a joke about the source of his family's wealth: "The oil, rubber and airline industries. My family ran an Exxon station near LaGuardia Airport.")

An early interest in stocks would eventually lead him into fancier neighborhoods. Learning the basics of investing from a pharmacist whom Grasso worked for part-time, he first took the plunge at age 13, plowing $1,000 he'd saved into shares of an airline company (which to this day he coyly refuses to identify).

The first step out of Elmhurst was a two-year stint in the U.S. Army in the mid-1960s, just as the Vietnam War was escalating. Then in April 1968, he took an entry-level job in the listings department at the NYSE.

He thought of it only as an interim gig until the job he was waiting for at a brokerage firm opened up. "I always actually wanted to trade," Grasso was quoted saying in a magazine interview last year.

But Grasso soon took to the exchange life. The most arcane details of the NYSE's operations fascinated him, and he soaked it up. He studied accounting part-time at Pace University in lower Manhattan while working at the Big Board. But he quit before graduating.

"He understood the workings of the exchange and its people," a veteran insider said. In addition to hands-on experience, Grasso had "a very firm grasp on the theory of the structure that the NYSE offers. He's no academic, but he could hold his own."

Undeniably, Grasso has great people skills. "His great asset is his ability to establish instant rapport with wide varieties of constituents," said Chris Keith, the former chief information officer at the Big Board, and now head of Global Trade, a financial software developer based in New York.

Five years after joining the exchange, Grasso was promoted to director of listings and marketing. From there his career moved inexorably upwards: to vice president of corporate services in 1977; to senior vice president of corporate services in 1981; to executive vice president of the marketing group in 1983; to executive vice president of the capital group in 1986; and finally to president and chief operating officer in 1988.

But it took more than a winning personality to move up the ladder. He was the consummate company man. According to one insider, Grasso was a master of "the artful resignation." He might let it out that he was going to accept a job offer from a specialist firm, but since the exchange didn't want to lose him, they'd promote him.

"Then two or three years later, he would do it again," the source said. "Every time he got another big appointment, it was like, Oh, he must have resigned again!'"

Since Grasso took over as chairman of the NYSE in June 1995, he's been at the top of his game with listings, trading volume and revenues soaring. Sure, a bull market has helped but so has Grasso's tendency to deal with every issue like Charles Barkley going after a rebound.

Probably the biggest battle he's facing now is beating a challenge from the Pacific Exchange (PCX) and Durango, Colo.-based OptiMark Technologies. If the PCX and OptiMark get what they want full access to the Intermarket Trading System (ITS) they could drain order flow away from the floor of the Big Board.

Order flow is a subject very close to Grasso's heart. High on his priority list back in June 1995 was the regaining of order flow in listed stocks that was being lost to the Cincinnati Stock Exchange (CSE), the PCX and the other regional stock exchanges.

In 1988, 86 percent of the transaction volume in listed stocks had been handled on the floor of the NYSE, a figure that dropped to 82 percent by 1992. Reversing the trend was tricky, because any change was going to make someone unhappy. The key was knowing how hard to push.

"The stock exchange is sort of like a labor union," Keith said. "You have to be able to deal with the rank and file and there are three ranks and files. There are the guys on the floor, the listed companies and the big firms. You have to keep the people on your team happy, and make them think you're their friend. Grasso does that manages those three interfaces better than anyone I've seen."

But Grasso wasn't afraid to play hardball. Some of Wall Street's biggest firms, like Goldman, Sachs & Co. and Morgan Stanley, were said to be reaping easy profits by diverting orders to the regionals. By flexing the NYSE's own rulemaking muscles as well as lobbying the Securities and Exchange Commission and jawboning people like Joseph Grano, president of New York-based PaineWebber and longtime friend of the NYSE chief Grasso managed to repatriate order flow for his specialists and floor traders without starting a civil war with the upstairs brokers.

The Big Board's share of trading volume in its stocks rose to 84 percent in 1997, thanks partly to the former Smith Barney's decision to close its desk on the CSE in 1996.

Then in April 1998, PaineWebber announced that it, too, was closing proprietary desks on several regional exchanges. Both firms steadfastly deny that pressure from the NYSE influenced their decisions. But to many market watchers, the entire process has been vintage Grasso.

Despite his growing visibility as the Big Board's bell-ringing cheerleader, Grasso still does his best work behind the scenes. Like the Wizard of Oz, he prefers to pull the levers that make things happen without letting the outside world see what he's doing or that he's even there.

Ironically, that may have contributed to the biggest setback in his career.

When John Phelan announced in 1990 that he would be stepping down as chairman of the NYSE, many insiders thought Grasso would take his place. Grasso had already been president for two years, he knew the exchange inside and out, and Phelan had been grooming him as his successor.

But the board of directors had other ideas.

"There seemed to be some reluctance in the beginning," recalled Paul Olsen, president of Olsen Securities, and a broker on the floor of the Big Board. "There was some difference of opinion, where someone wanted a nationally-known person."

That person turned out to be William Donaldson, co-founder of New York investment bank Donaldson, Lufkin & Jenrette, who would serve as chairman through May 1995. For once, Grasso's behind-the-scenes experience may have worked against him.

"Grasso was ready for prime time before he was actually drafted," said Steven Wunsch, president of the Arizona Stock Exchange, and a stock exchange history buff. "The assumption at the time Donaldson was chosen was that Grasso was too much of an insider, and he wouldn't be able to deal with the political and outside forces that the exchange has to deal with."

Donaldson was a much more traditional choice for chairman. He was well known. He mingled easily with power brokers and policy makers. He looked good on the cover of business magazines.

"The chairman of the NYSE was always an establishment kind of guy, someone who the issuers would feel was part of their group," Bernard L. Madoff, chairman of a New York-based third-market firm that bears his name, told another reporter recently. "Dick wasn't like that."

But Dick had always been a fighter, and he knew how to get up after a knockdown, shake it off, then make the other guy pay. Grasso was still president of the NYSE, and in public he remained diplomatic, a professional and a team player. His personal feelings can only be speculated upon, though few doubt that Grasso was incensed by the board's decision.

He also had no use for the new chairman. "Grasso wouldn't talk to Donaldson if he didn't have to," said an exchange insider who asked not to be named. There were also rumors that Grasso didn't mind upstaging his boss when the opportunity arose.

"For instance," the exchange insider said, "someone would ask a question at a board meeting to catch Donaldson flat-footed, something he couldn't answer. Then Grasso would come to the rescue."

Whether the rumors are true or not, they reflect the undisputed fact that Grasso has a combative nature, a razor-sharp mind and a long memory. And nowhere are those traits more clearly seen than in his never-ending battle for new listings.

The NYSE and Nasdaq both say foreign-company listings are the key to future success, and both have been campaigning far and wide to get them. But for Grasso, even the biggest trophies from overseas don't seem quite as sweet as the ones snatched from Nasdaq.

"It's not just competition," said one observer, about attitudes inside the NYSE toward Nasdaq. "It's hatred. Loathing."

One memory fueling that hostility dates back to 1992, the bicentennial of the NYSE's founding. It wasn't a great period for the NYSE losing marketshare and generally drifting under Donaldson. And it certainly wasn't for Grasso, Donaldson's restless number two.

Meanwhile, the upstart Nasdaq seemed to be having all the fun high-tech initial public offerings every week, money flowing in, volume going up, media attention, the works.

The bicentennial at least gave the NYSE something to celebrate and Nasdaq did its best to rain on the Big Board's parade, rolling out its slick advertising campaign with the famously in-your-face slogan, "The Stock Market for the Next Hundred Years."

That's the stuff of which vendettas are made and Grasso has the kind of memory where insults never die. So it should surprise no one that he trumpets every defection from Nasdaq with what might be called irrational exuberance.

"I have a deep desire to bring all the great technology companies that trade on Nasdaq here," Grasso said in an interview in the fall of 1995.

He set up an office in Menlo Park, Calif., from which to court Silicon Valley's hot properties. And Grasso has since gleefully welcomed a string of high-profile converts, including Bay Networks (whose biggest customer happens to be the NYSE), America Online, Iomega and Gateway 2000.

In the process, he's revealed a taste for showmanship that would make P.T. Barnum feel right at home.

Take the morning in May 1997 when Gateway began trading on the NYSE. Grasso savored his coup by welcoming the company mascot, Arianna a Holstein cow with the same black-and-white markings as Gateway's shipping cartons right there at the exchange. (Possibly, she had walked there from Nasdaq's headquarters in Washington.)

The hoopla isn't limited to technology companies. To hype Revlon's IPO in February 1996, Grasso toured the packed floor with supermodels Cindy Crawford and Claudia Schiffer, creating a brief but powerful distraction.

In October 1997, just before France Telecom's American Depository Receipts opened for trading, a line of whooping can-can dancers high-kicked their way past a phalanx of startled traders.

One day last February, the exchange building had a giant-red ribbon draped over it, and Grasso had people on the corner of Wall Street and Broad Street hand out announcement cards, pocket calendars and boxes of chocolates. It was all explained in the press-release headline: "American Greetings Wraps the NYSE as a Gift Celebration of Transfer From Nasdaq."

And this August, Grasso staged a $2 million beach party right outside the NYSE complete with a boardwalk on Broad Street, tons of real sand, play-it-yourself volleyball, and Kool and the Gang singing its disco hits from the 1970s. The celebration was for the Big Board's biggest new listing ever: German software giant SAP, with a market valuation of $70 billion. The connection to beach volleyball wasn't entirely clear to some members.

Some, in fact, are getting tired of the whole circus atmosphere.

"It's definitely wearing thin for the membership," one member said. "The mobs of people that come through the trading floor on the listings. They invite the whole company down. It's getting a little ridiculous."

Grasso was certainly having fun last December as he presided over a big bash celebrating the year's successes especially the newest defections from Nasdaq. The party included a film laced with glowing testimonials from corporate chiefs who described the NYSE's supposedly narrower spreads, its fine reputation, and all the other benefits that convinced them to make the leap from Nasdaq. (You could almost read Grasso's mind: "Stock market for the next hundred years, huh?")

And he continues to roll up the numbers. To date, some 200 companies have delisted from Nasdaq and begun to trade on the NYSE, along with about 50 from the American Stock Exchange.

Nevertheless, the Big Board has struck out so far with targets like Cisco Systems, Amgen and Dell Computer. Looming above them, of course, are the ultimate prizes, Nasdaq's twin towers Microsoft and Intel. Not since the Pinkertons rode off to chase Butch Cassidy and the Sundance Kid has anyone waged such a tireless crusade.

Grasso has lobbied them publicly and privately, year after year but his usual spiel about the NYSE's liquidity and prestige simply hasn't worked on two companies that have plenty of both.

Still, "never say never" is one of Grasso's favorite phrases. For years, Wall Street's ultimate status symbol has been a one-letter stock symbol on the Big Board. And Grasso has very publicly reserved the only two letters still available: "I" and "M" (for Nasdaq's Intel and Microsoft).

Dick Grasso may gloat over Nasdaq's woes, but he borrowed at least one page from their playbook when he powered the Big Board's new marketing and publicity campaigns. He saw what advertising had done for Nasdaq, and he knew that the Big Board's image complacent, arrogant, slow to change could use a serious makeover.

These days, his public-relations people are churning out press releases and arranging media events like a Hollywood movie studio. Grasso approved a $7 million advertising budget for 1996, and doubled it in 1997. His aim was to pitch the Big Board itself as a brand name, just like the blue-chip companies that list there.

"Every day we wage what we call a corn flakes war of brand preference' with Nasdaq," Grasso explained in an interview last year.

He also made real-time stock prices available to cable stations like CNBC and CNNfn, and encouraged broadcasters to use the NYSE as a sound stage. Now millions of viewers can watch the opening and closing bells every day, with numerous updates in between from floor reporters stationed in the midst of the roiling crowd.

All this breaking-news-style coverage may not have much effect on actual trading. But it does send out a dynamic image of the NYSE as the place to be the Big Show, the Vatican of Money. And that's the sort of intangible that makes it easier to persuade, say, Hasso Plattner to list SAP on the Big Board instead of that other market.

Grasso's embrace of the media might seem slightly ironic, in view of his reputation for secretiveness and for over controlling things.

"There's always been sort of a bunker mentality among NYSE executives," said one observer. "Outsiders are distrusted and the press is seen as the enemy."

Maybe that's why the Big Board's official biography of Grasso contains almost no personal information. Even his entry in "Who's Who" omits the most routine details when he was born, or whether he's married or has any children. Grasso evidently thinks "Who's Who" should be renamed "Who Wants to Know?"

In the close-knit world Grasso knows as an insider, however, it becomes hard to see things any other way. "He has a band of people to whom he is exceedingly loyal," said a person familiar with the matter. "But he demands exceeding loyalty in return. If you're on his team, he'll back you to the hilt but you don't do anything without his OK. And maybe that's necessary for something like the NYSE."

How will Grasso's loyalty to the floor traders and the specialist community affect his handling of the PCX and OptiMark challenge? Indeed, how will it affect all the other threats that loom every day?

At press time, the current standoff over the proposed PCX and OptiMark link to the ITS can't last much longer. The ITS is the backbone of the National Market System envisaged under the Securities Act Amendments of 1975. If the PCX and OptiMark have their way, some at the Big Board fear the lifeblood of the exchange could be drained. Simply put, institutional orders for listed business could bypass the Big Board.

The NYSE originally argued that the PCX and OptiMark plans violated core principles of the National Market System by attempting to use the ITS as an order-routing system to freely access the NYSE something the ITS operating plan did not allow.

But in July, the SEC, citing the value of competition, proposed amendments to the ITS operating plan that would allow the link to proceed on a preliminary basis. The Big Board has now called for a rule that would force OptiMark to look for a match on the PCX for 15 seconds before sending an order through the ITS.

"The only reason we can believe the NYSE wants to do that," an OptiMark spokesperson said, "is to turn it from an automated system into a manual system for a while."

The Big Board also wants a rule placing a five-percent cap on the amount of OptiMark's volume that can be executed via the ITS. For its part, the PCX thinks 20 percent would be fair.

Frustrated NYSE officials have asked the SEC to refrain from adopting any plan now, and instead to direct ITS participants to continue negotiating the terms of a linkage. They accuse the PCX and OptiMark of posturing, and dragging their feet on negotiations because the SEC seems ready to act on its own.

The stakes are enormous, and the threat isn't only from one direction. The National Association of Securities Dealers recently petitioned the SEC to give its members wider access to the ITS potentially widening the doorway for Nasdaq market makers that want to trade NYSE-listed stocks.

Since November 1997, it has been technically easier for Big Board-listed companies to delist to Nasdaq. And automated trading systems overseas are pushing floor-based exchanges into extinction.

Can Dick Grasso keep his exchange at the cutting edge? The NYSE is proposing to give institutions easier access to its electronic order book and to make it more transparent, and Grasso often mentions that the NYSE has spent more than $1 billion to upgrade its systems. But he also proclaims his commitment to the auction market.

"You never say never, but I've yet to see a technology replicate it," he has said of the Big Board's floor environment. "Our customers want a broker and not a mailbox."

Is Grasso in denial about electronic trading? It may not take long to find out.

"Grasso is a past master at running the exchange as it exists," Keith observed. "It's an open question whether he'll be a past master at changing and adapting. You have to be like a surfer ahead of the wave. And the question is, In the next two or three years, is the wave going to catch Grasso?'"

How he handles a surfboard is anyone's guess. How he handles problems may be more to the point and one market veteran offers a clue: "If you were going into an alley for a knife fight, you wouldn't want to go up against that guy."

John W. Keller is having more fun the second time around. Keller is head trader at Mellon Equity Associates in Pittsburgh. The firm is an asset-managing arm of Pittsburgh-based Mellon Bank. He joined Mellon Equity in 1994 to build its trading desk.

The task was old hat for Keller. Six years earlier, he had built the Richmond trading desk of the Virginia Retirement System (VRS).

"Mellon Equity was a great opportunity. It was bigger fish to fry," Keller said. "My experience at VRS was invaluable when I set out to build the desk here."

Before Keller arrived, Mellon Equity's trades for the institutional accounts of corporations, public funds, health plans and endowments were done by Mellon Bank's trust department. But in early 1994, with Mellon Equity growing in size, the firm decided to focus more on trading.

Today, Keller and two other traders handle the orders for Mellon Equity's eight major products. The firm has just under $22 billion in assets under management, with 80 percent invested in equities. The portfolios are handled quantitatively and monitored by seven managers. The firm is also a sub-advisor for Dreyfus Institutional Investors, a mutual-fund subsidiary of Mellon Bank.

"Mellon Equity offered a unique opportunity," Keller said "Because we're a quant shop, I was given the chance to implement cutting-edge technology on the desk."

Mellon Equity's portfolio managers work with a quantitative computer system that ranks more than 3,600 stocks. The system using complex mathematical models programmed as rules ranks stocks on a scale of one to ten, ten being the highest ranking. Looking at up to 15 factors per stock, it is computer-driven asset management.

The portfolio managers have a preset formula for each of the products. Based on its rankings, the system picks stocks to buy or sell when rebalancing the portfolios. The firm has a strict schedule for rebalancing to the preset formula. The portfolio managers meet with Keller weekly to readjust the products.

When he arrived in 1994, Keller wanted to create a desk to fit seamlessly into Mellon Equity's quantitative management.

Almost immediately, he implemented Predator order-management software from the Boston-based MacGregor Group to serve as the heart of the desk.

Up and running by the end of 1994, Predator is integrated with the firm's accounting and portfolio-management systems. It also routes orders directly to liquidity sources.

"It does all of our clerical work, and it has brought errors down to nil," Keller said.

Keller has a core of 20 brokers he maintains relationships with. But most of his order flow is handled electronically, by Reuters Holdings' Instinet or New York-based Investment Technology Group's POSIT, among others.

Strong performance in small-cap products earlier this year caused Mellon Equity to add more-specialized regional firms to its list of brokers.

"The 20 brokers allow us to be flexible and get best execution," Keller added. "We want relationships with forward-thinking people."

Keller credits much of the success in implementing new technology on the desk to Mellon Equity's portfolio managers.

"I get complete support from my portfolio managers. We have close relationships," Keller said. "It's less confrontational because the system helps to make a lot of decisions. There are no star managers. No prima donnas."

Having experience building a desk at VRS helped Keller at Mellon Equity.

"VRS was great fun. It was a progressive plan sponsor, and I worked with good people," he said. "I had freedom, and I was able to model the desk at VRS with full support of the firm. So when I came to Mellon Equity, I knew what I wanted to do."

Keller began his trading career on the sellside in 1982, as a clerk on the floor of the New York Stock Exchange, first for Louisville's J.J.B. Hilliard, W.L. Lyons, and then for New York-based CS First Boston.

In early 1987 just before the market crash that followed in October Keller moved upstairs to CS First Boston's block-trading desk. "It was a blessing to go upstairs before the crash," he recalled. "Things looked miserable on the floor that October. But it wasn't exactly easy upstairs either."

He traded on the block desk at CS First Boston for a year before moving to VRS and the buyside in 1988.

"I just followed my gut," Keller said. "I though the buyside would be best for me. I wasn't comfortable on the sales end of trading."

Keller and his family wife Kathy and their two children, six-year-old Erin and four-year-old Jack have fully settled in the Pittsburgh area, almost.

Keller wouldn't say he's totally settled.

"There is always something out there that could make the desk better," he said. "I'm never totally comfortable on the desk, no matter how up to date I am."

But this time around, it seems Keller's pretty close.