Fidelity, local exchange near deal

Fidelity Investments and several major Wall Street firms are close to a deal with the Boston Stock Exchange to create a new electronic trading network that could rival the US market's two major exchanges in a new era of competition in the buying and selling of stocks and other securities, said two people who have been briefed on the talks.

If an agreement is consummated, the Boston Stock Exchange would own about 64 percent of the new venture. Fidelity and the Wall Street firms collectively would contribute around $20 million and split ownership of the remaining shares, according to published reports and information provided by the people briefed on the plans. The venture could be announced as early as this week, they added.

Fidelity spokeswoman Anne Crowley declined to comment, as did a spokesman for the Boston exchange.

Analysts said a deal could give Fidelity access to a lower-cost network for its customers, at a time when the two major exchanges, the New York Stock Exchange and the Nasdaq Stock Market, are poised to dominate electronic trading.

An agreement could also breathe new life into the Boston Stock Exchange. Its revenue plunged 20 percent in 2004 as business declined ''significantly," according to its annual report.

This is a period of incredible ferment in the trading world. This year, the Securities and Exchange Commission adopted a far-reaching change that requires trade orders be filled at the best price, rather than at the fastest possible speed. Analysts said that should spur even more emphasis on lower-cost trading networks.

The New York exchange and the Nasdaq have each made deals with two of the industry's top electronic networks.

Yesterday, the Philadelphia Stock Exchange outlined a deal in which six investors, including major Wall Street firms, Citigroup, and Morgan Stanley, could own up to 90 percent of the exchange.

The Philadelphia exchange's chief executive, Meyer ''Sandy" Frucher, said the new partners would help transform the venerable institution from a niche player to major actor.

The Boston exchange got a glimpse of how electronic trading could be its salvation when it launched an all-electronic options exchange last year, which quickly captured more than 6 percent of the market. Some of the corporate investors in the Boston Options Exchange are reportedly part of the team with Fidelity in this new venture, including Citigroup and Credit Suisse First Boston.

Spokeswomen for Citigroup and CSFB declined to comment, as did a spokeswoman for Lehman Brothers, another potential investor in the Boston deal.

For Fidelity, such an investment would make sense on several fronts, industry officials and consultants say.

At a conference earlier this year that Fidelity holds annually for clients, chairman Edward C. ''Ned" Johnson III said the company is focused on capturing more brokerage and securities-related transactions and services, in keeping with its diversification from the core mutual fund business, said Fred Graboyes, president of the brokerage firm Tradetrek Securities LLC, who attended.

While these business potentially have lower margins than running mutual funds, Graboyes said, they are less risky. ''And if you can do it at scale, it becomes much more profitable," he added.

But a new trading market may also be Fidelity's response to the blitz of changes underway in the industry.

Sang Lee, managing partner of Boston-based industry consultant Aite Group, said companies such as Fidelity could view the NYSE and Nasdaq deals as in effect creating a ''duopoly" that could limit competition. ''If you have just two large exchanges, what happens to the cost of execution" of a trade? he asked. ''Will trading become more expensive?"

A new electronic network would give Fidelity a say in trading rules, Lee said. Fidelity accounts for as much as 5 percent of daily volume on both the Nasdaq and New York exchanges but has not always been able to influence market rules, he said.

''In the past, Fidelity has been frustrated because it hasn't had any say in the major electronic trading venues," Lee said. The new business, he added, could be ''more about dictating policies within exchanges," by eliminating, for example, certain trading restrictions on various stocks that could affect price.

Fidelity and the other investors could use their prodigious trading volumes to attract other players to a new Boston electronic network, which would improve liquidity, lower costs, and pose a challenge that could force other major players to remain equally competitive, said Sang and Larry Tabb, founder of Tabb Group, a Westborough consulting firm.

Andrew Caffrey can be reached at caffrey@globe.com.