When David F. Holland took $800 million-asset Boston Fed Bancorp public in 1995, he challenged representatives of the American Stock Exchange and Nasdaq to win his business.
After extensive conversations with both, the Burlington, Mass., thrift president chose the American Stock Exchange.
"The narrow spreads on the auction market drew us to Amex," Mr. Holland said. "Others told us that without the market makers we would have trouble with volume, but we've been pleasantly surprised at how it's held up.
"We've got low spreads and high volume, the best of both worlds."
Mr. Holland's sentiments are music to the ears of American Exchange officials. Long viewed as a distant second choice for small banks going public, the exchange has come on strong in recent years.
Since 1993, the number of banks and thrifts that have joined the American Exchange has jumped dramatically, from five that year to 15 in 1996. By contrast, Nasdaq, which has suffered from allegations of unfair trading practices for several years, has watched its cadre of new banks and thrifts fall from 85 in 1993 to nine last year.
Competition between the exchanges went into overdrive in 1994 when Richard Syron, a former president of the Federal Reserve Bank of Boston, became the American's chairman.
Mr. Syron has focused his efforts on drawing the banking sector to the exchange. He has installed a number of "listed companies services," which facilitate exchanges between bank managements and institutional investors, and touted the heavily regulated "specialist" system.
Mr. Syron asserts that this system lowers the cost of trading for shareholders below that of Nasdaq by bringing together buyers and sellers of stocks and "letting the market dictate the prices" of the transactions.
By contrast, Nasdaq is a "dealer" market, in which "market makers" bring together investors buying and selling to ensure the stocks "make the market;" in exchange for its services the dealer keeps the difference between the "bid" and "ask" prices.
But this system has come under scrutiny in recent years. Market makers on Nasdaq have been accused with artifically inflating spreads, and the Securities Exchange Commission in August issued a cease-and-desist order for such practices.
Such negative press has created a great deal of uneasiness, especially among smaller companies.
"Nasdaq is a very informal market," said Doug Faucette, principal with the Washington law firm Muldoon, Murphy & Faucette. "For high cap companies with larger trading volumes, it is more efficient, but for companies without a lot of trading, there is some nervousness about fair prices."
But Nasdaq is working hard to alter the way it does business. On Monday, officials there announced changes in the way that market makers execute customer limit orders. One will require market makers to display the spread between the highest buy bid and the lowest sell offer so that the level of interest is reflected in the market maker's quote.
This benefits the customers placing the orders, because it gives them the chance to set the price at which execution takes place, according to Bill Broka, senior vice president of trading and market services at Nasdaq.
The changes, in effect, would create a hybrid dealer/auction market, according to one Nasdaq spokesperson.
Garreth Plank, an analyst with Sandler O'Neill & Partners agreed that "the Nasdaq is a well-policed market. Though it has had execution problems at times, the exchange has had much growth and sophistication. It is not nearly the same as it was 20 years ago."