“The Nasdaq Stock Market has approached the New York Stock Exchange to explore the possibility of a merger of the two giant marketplaces, people familiar with the situation said,” writes Kate Kelly in today’s Wall Street Journal.

“Nasdaq’s approach, made about three weeks ago by Chief Executive Robert Greifeld, comes at a time when the 32-year-old electronic market has been losing market share to alternative trading sites and has seen the number of stocks it lists continue to decline.”

“The market of choice for technology companies and their investors, Nasdaq was devastated by the burst of the Internet bubble nearly four years ago, a blow from which it hasn’t fully recovered.”

“The NYSE is in a tough spot, too. Three months ago, Dick Grasso, its longtime chairman, was forced out amid a corporate-governance scandal and a public outcry about his $187.5 million package of deferred compensation and retirement benefits. Questions about the integrity of the NYSE’s trading model also have been raised amid a continuing investigation into specialists, the auctioneers who oversee buying and selling of stocks on the exchange floor. The Big Board and the Securities and Exchange Commission are probing whether five specialist firms committed trading violations that may have cost customers more than $155 million. For 2003, the exchange’s share of trading in its own listed stocks promises to dip below 80% for the first time since records began being kept in the 1970s.”

“The merger idea is at a very preliminary stage, according to the people familiar with the situation. No formal proposal has been made, and serious talks have not yet begun.”

“Mr. Greifeld wasn’t available for comment. A Nasdaq spokeswoman declined to address the matter, citing a policy not to comment on market speculation. John Reed, interim chairman of the NYSE, was traveling and couldn’t be reached.”

“A merger of Nasdaq and the NYSE could have far-reaching implications for the way U.S. stocks are traded. Currently, the Big Board relies on a human-based auction model to trade stocks, while Nasdaq stock traders buy and sell shares through a vast system of interconnected computers spread across the nation. A decision on whether to talk further with Nasdaq will be made in part by the Big Board’s newly appointed CEO, John A. Thain, a longtime Goldman Sachs Group Inc. executive who is a proponent of the trading model that Nasdaq and its electronic competitors already embrace.”

“Any merger would face significant hurdles. Combining marketplaces is a complicated endeavor that often fails. In 1999, in fact, the Nasdaq and the NYSE discussed a merger, but the talks ended without an agreement.”

“Meanwhile, many marketplace unions, such as the Nasdaq parent’s 1998 merger with the American Stock Exchange, have flopped, hurt by conflicting trading models, cultural divides and economic problems. The National Association of Securities Dealers, which owns both Nasdaq and the Amex, now is attempting to sell the Amex back to its own members, after a deal to sell the exchange to Chicago private-equity firm GTCR Golder Rauner LLC for $110 million fell through.”