Small Exchanges Adapt

REGIONAL stock exchanges throughout the United States are suddenly under new pressure because of the accelerating movement toward 24-hour trading, as underscored by the New York Stock Exchange's decision to extend trading until 5:15 p.m. While still adhering to its traditional close at 4 p.m., the NYSE is now allowing limited trading until 5 p.m. on individual stocks and trading on baskets of stocks for large institutional investors until 5:15 p.m. And these steps, the exchange says, are only the first alterations in what will eventually be full-scale 24-hour trading.

As a result of the later hours for the Big Board, one regional exchange - Boston's - has announced that it too will remain open until 5 p.m. The Boston exchange feared it might lose what are called "good-till-canceled" orders (not completed by closing time) to New York, with its extra hour of trading.

Nor are the regionals alone in feeling the new competition. The Big Board's main rivals are also moving toward later hours, including the NASDAQ over-the-counter market, which is No. 2 to the NYSE in terms of trading activity; and the American Stock Exchange, which is developing its own 24-hour trading system in partnership with Reuters Holdings PLC and the Chicago Options Exchange.

Still, the main impact of the movement towards 24-hour trading may ultimately be most pronounced at the regional exchanges, such as the Pacific Stock Exchange in San Francisco, the Midwest Stock Exchange in Chicago, and the Boston Stock Exchange.

Because of the global computerization of trading, competition for these exchanges was hot even before the Big Board extended its hours, says Merton Miller, a finance professor at the University of Chicago Graduate School of Business.

The extension of Big Board trading hours by itself is not all that important, says Dr. Miller. "The NYSE has really just done what was happening anyway," he says. But what is important, is the overall competitiveness of global 24-hour trading, of which the Big Board trading now becomes a part, Miller says.

"The regional exchanges will have to scramble for more to do," in terms of offering trading in specialized types of investments and adoption of the most sophisticated technology, Miller says.

Some exchanges, such as options markets, may even decide to merge, experts say.

Given advances in global computer grids, traders throughout the world are now able to shift their trading from one exchange to another, moving from Tokyo to New York to London, Paris, and elsewhere. In seeking regulatory approval for its drive-time trading hours, Big Board officials noted that they lose upwards of 15 million shares a day that are traded elsewhere.

The NYSE wants that business back.

Regional exchanges date back to the earliest days of the US, when communication was far less instant than now; by the early 1900s there were well over 100 regionals. Now, only a dozen or so regional exchanges are left. What can happen when a regional exchange loses touch with changing technology and trading is illustrated, experts here say, with the recent demise of the 94-year-old Spokane Stock Exchange. Spokane was the nation's smallest regional, dealing in both mining stocks (a specialty), and penny s

tocks, which are issues that usually trade for a few cents to a few dollars.

Unable to sharply diversify its type of trading or compete with more sophisticated exchanges, the Spokane Exchange finally slammed its doors shut in May.

Still, many regionals continue to play an important role, says Marshall Blume, a professor of finance at the Wharton School of the University of Pennsylvania. Dr. Blume says the regionals tend to offer lower commissions on trades, specialize in certain types of trading, and do a good job of providing retail services.

And there is another matter, experts note: a number of Wall Street brokerage houses are actively trading for their own portfolios of stock - what the market calls "proprietary trading." Many of these trades are executed through regional exchanges, which often makes it difficult for others to know which brokerage house made the trade.