Nasdaq, America’s No 2 stock exchange, is in talks over a merger with the Philadelphia Stock Exchange, just months after its abortive attempt at a hostile takeover of the LSE.

Philadelphia, the oldest stock exchange in the United States, founded two years before the New York Stock Exchange on Wall Street, is tiny in comparison with its New York rivals, but it has a strong position in the derivatives market. It is also one of the leading options trading forums in America.

Nasdaq has made no secret of its desire to expand into options trading. Bob Greifeld, the exchange’s chief executive, has said that he hoped to develop an options platform by the third quarter of the year.

Nasdaq declined to comment about the talks.

Wall Street sources told The Times that Mr Greifeld had approached Meyer Frucher, Philadelphia’s chairman and chief executive, to discuss the possibility of a merger. The sources added: “There are no advisors engaged; you could call them talks about talks.”

Philadelphia sources said that the smaller exchange responded to Nasdaq with the view that a deal with a bigger exchange would provide it with a further option to consider as it maps out its future.

The exchange is 90 per cent owned by a group of Wall Street banks and is exploring an initial public offering (IPO) as a first step towards expansion.

A spokeswoman for the Philadelphia exchange declined to comment about the speculation of talks between the companies, but said: “We talk to large numbers of people. We have not made a deal with anyone. We are still exploring the possibility of an IPO.”

Mr Greifeld is keen to seal a deal after his abject failure to win the London Stock Exchange. He is also keen to make ground in the options market, which has grown in popularity in recent years.

Hedge funds, in particular, use options and futures to mitigate risk in their investment portfolios. According to data from the International Futures Association, 6.5 billion options contracts were traded around the world in 2006, an increase of almost 11 per cent on 2005 volumes. Last month, more than 228 million options contracts were traded, a 39 per cent increase from March 2006.

A Nasdaq source said last night that the talks with Philadelphia may not lead to a deal and that the New York-based stock exchange was keeping all options open.

There have been rumours in the past that Nasdaq is considering a deal with the Boston Options Exchange.

Analysts believe that the Philadelphia exchange could fetch up to $300 million (£151 million), which leads them to deduce that the company has earnings of about $10 million a year and trades on a multiple of 30 times profits. Such a small deal would be easily digestible for Nasdaq, industry sources believe.

Analysts at Sandler O’Neill also believe that Nasdaq would have another takeover battle on its hands if it made a move for Philadelphia.

“We believe there could be potential other interest in Philadelphia beyond Nasdaq from other equity exchanges and option exchange peers”, the analysts wrote in a report published yesterday.

“We would not rule out international interest, either,” they said.

Past futures

Global futures and options trading by volume (2006)

1 Korea Exchange 2.4 billion contracts
2 Eurex 1.5 billion contracts
3 Chicago Mercantile Exchange 1.4 billion contracts
4 Chicago Board of Trade 805 million contracts
5 Euronext.life 730 million contracts

12 Philadelphia Stock Exchange 273 million contracts

Source: Futures Industry Association

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