DoJ Digs Deep into Nasdaq-Instinet Deal

Wall Street firms, also apparently worried about a duopoly and a possible squeeze on transaction fees, have been investing in smaller exchanges themselves.

An inquiry by the Department of Justice into the proposed merger of The Nasdaq Stock Market and Instinet Group is intensifying, The Times of London reported.

There’s been persistent concern over the potential negative impact that the deal could have on competition, especially after April’s announcement of a merger between the New York Stock Exchange and the Archipelago Exchange, an electronic trading platform. The Times observed that apparently, Justice Department officials fear that the two biggest stock exchanges might develop into a duopoly. Nasdaq chief executive officer Bob Greifeld told the paper that the DoJ did not specify a reason for deepening its inquiry; he also denied any notion of a duopoly.

Nonetheless, Wall Street firms worried about a possible squeeze on transaction fees have been investing in smaller exchanges themselves. Last week, Fidelity Brokerage, Citigroup, Credit Suisse First Boston, and Lehman Brothers Holdings joined the Boston Stock Exchange to launch a competing electronic stock market. And earlier this month, Citigroup, CSFB, Morgan Stanley, and UBS announced stakes in the Philadelphia Stock Exchange.

Reportedly, the DoJ is scrutinizing the proposed Nasdaq-Instinet merger especially closely because it would boost Nasdaq’s market share of trading in its own listed stocks from about 50 percent to about 80 percent. By contrast, should the NYSE-Archipelago merger go through, the Big Board would see its 80 percent share of trading rise just 2.5 percent, according to the Times. According to Bloomberg reports earlier this year, Archipelago would also help the NYSE gain a foothold in the derivatives market — and facilitate the trading of shares listed on the Nasdaq.

Computerized trading of stocks has been gaining in popularity for years. In April, the Securities and Exchange Commission passed the “trade-through rule,” which requires that all investor trades be executed at the best price, even if stock markets must fill the order through a competitor. As a hybrid exchange, the NYSE will have a tricky balancing act as it executes trades both electronically and through floor-trading specialists; whether corporate issuers stand to gain or lose remains to be seen.

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