Stock Markets: Those Other Exchanges

The eyes of most investors were on New York last week, where the long-sluggish Dow-Jones industrials managed a six-point gain for the week. In 13 other cities throughout the nation, however, stock activity was just as spirited and satisfaction just as solid as on the floor of the Big Board. These are the sites of the regional exchanges, a series of smaller but important stock exchanges that serve U.S. companies and investors from Honolulu to Boston.

Though the New York Stock Exchange still dominates U.S. stock trading with 83% of the $72 billion-a-year market, its share has slowly been declining since 1962. At the same time, the regional exchanges have hustled their way to a 55% increase in trading volume. Together, they now do more business than the second-ranking American Stock Exchange, and are growing at a faster pace than either of the two Wall Street exchanges.

Because of this growth—and the prospect of more to come—the cost of seats on the regionals has been rising steadily. It shot up from $3,000 to $8,500 this year on the Boston Exchange, from $10,000 to $12,500 on the Chicago Exchange and from $10,000 to $19,000 in Detroit. On the fast-growing Pacific Coast Exchange, which operates trading floors in both San Francisco and Los Angeles, the price has soared 400% from its $7,500 level in January. Last week the New York brokerage firm of Bear, Stearns & Co. became the second firm in five days to pay $37,500 for a Pacific Coast seat.

Growing Appetite. The regionals serve as a marketplace for shares of companies too small or local to be listed on the bigger exchanges, but the function is declining. Today only 739 stocks are traded exclusively on regional exchanges v. 1,300 in 1940. Their main role has changed to being that of a secondary market for shares traded on the New York and American boards, whose prices they closely follow. The surge in the price of seats reflects the growing appetite among member firms of the New York Stock Exchange to join the regional exchanges—notably the six largest that do 99% of the regional business: Midwest, Pacific Coast, Philadelphia-Baltimore-Washington, Detroit, Boston and Pittsburgh.*

Companies like to get on regional exchanges for the prestige of being widely traded and in the hope that a broad trading market will stabilize swings in their stock. Stockbrokers like the lower membership fees, the lower capital requirements and the less restrictive rules; some regionals go so far as to let their members split fees with nonmembers. The Big Board, on the other hand, bans fee splitting with nonmembers, including even such big customers as mutual funds and pension funds, who buy and sell shares in mammoth blocks. In a move that stunned most of the investment community, the Pacific Exchange recently became the nation's first to admit mutual-fund management companies to membership—a move that, if it becomes a trend, could cause brokers to go flocking to the regional exchanges in pursuit of their business. There has already been a rush of other mutual fund managers, among them such giants as Lehman Brothers and Dreyfus & Co., to buy Pacific Coast seats.