Competition to win new listings has fueled consolidation among specialty firms at the New York Stock Exchange for the last few years, and observers expect the trend to continue.
Bear Stearns Cos. said Thursday that it had agreed to buy Wagner Stott Mercator LLC, which makes markets in 226 stocks traded on the Big Board, including Citigroup Inc. and Merrill Lynch & Co., for $625 million. The combined operation, to be called Wagner Stott Bear, would specialize in 359 stocks and would be the third-largest in trading volume.
Bear Stearns is buying the stake through Bear Hunter Specialists, its joint venture with an investment group called Hunter Partners. After the deal closes in the second quarter, Bear Stearns would own 49.8% of Wagner Stott, and Hunter Partners would own the rest.
The deal is just the latest example of consolidation among the largest New York Exchange specialist firms. A decade ago, more than 50 firms made markets in shares listed on the Big Board. Many of these firms were family owned boutiques that represented a small portion of issues. But since then bigger companies, including large financial institutions, have been moving into the specialist business. There are now only 20 specialist firms left, according to a New York Stock Exchange spokesman.
At issue is the process of winning new business. The exchange used to randomly assign new stock listings to specialist firms. That stopped about two years ago. Now winning new business is similar to what investment banks have to go through, said Joan Solotar, an analyst at Credit Suisse First Boston.
Naturally, observers said, companies tend to pick the bigger specialist firms. The job of a specialist is to maintain orderly markets in listed shares. In the event of a steep drop in the markets, a specialist would step in and buy the stock it represents using its capital. Deep-pocketed firms, thus, offer more comfort to listed companies.
This week, for example, E-Trade, which switched from the Nasdaq to the New York exchange, announced it had picked Fleet Meehan Specialist, a unit of FleetBoston Financial Corp., to represent it on the Big Board.
Fleet Meehan, an amalgam of firms cobbled together in mergers over the last few years, including the specialist operations of Quick & Reilly Group, M.J. Meehan & Co., and the former specialist unit of Merrill Lynch, is one of the top three specialist firms in issues traded and volume. It accounts for 18% of the exchanges order flow.
Wagner Stott Bear would account for over 18% of the dollar volume traded on the exchange. The Big Board restricts individual firms from controlling more than 27% of the order flow, analysts said.
We believe that bolstering our position as a top NYSE specialist is a vital extension of Bear Stearns strategy of being a leading provider of liquidity, execution, and clearing services, said James E. Cayne, president and chief executive officer of Bear Stearns, in a press statement.
Wagner Stott, which was founded in 1917, has also expanded by acquisition. In 1995 Wagner Stott & Co. merged with Mercator Partners to form Wagner Stott Mercator. In 1999 the firm acquired CMJ Partners.