Chicago to Launch New Stock Exchange

THE Chicago Stock Exchange plans to parry the one-two punch of technology and price competition by launching later this year what it calls a state-of-the-art stock market.

The new market -- the United States Stock Exchange -- would not have a trading floor but would execute trades electronically. If approved by the Securities and Exchange Commission (SEC), the exchange will begin trading sometime in the second half of 1995, says Chicago Stock Exchange spokeswoman Tracy Galla.

The new market is an attempt by the Chicago Stock Exchange to compete against securities firms that execute stock trades themselves electronically in what is called the ''third market'' outside traditional exchanges and their trading floors. The third market is a fast-growing rival to traditional stock exchanges, say finance experts.

The US Stock Exchange is controversial because it will operate in a gray area between traditional stock exchanges and the steadily growing third market. The SEC plans to review the proposed exchange next month, said a Chicago Stock Exchange executive, who requested anonymity.

In broad terms, the plan for the new exchange shows that, with the volume of securities trading steadily rising, markets have become increasingly complex and competitive.

''Competition is driving the launch of the exchange. This is a huge business, and it is getting bigger as markets in other parts of the world become more developed and more liquid,'' says Michael Fishman, a professor of finance at the J.L. Kellogg Graduate School of Management at Northwestern University in Evanston, Ill.

The Chicago Stock Exchange says the proposed market would combine the convenience and efficiency of an electronic market with the safeguards of a traditional stock exchange. It would have 199 members, a governing board, and begin trading at least 350 stocks.

Many firms have found the third market irresistible. There, analysts say, traders are less regulated and can execute transactions more cheaply. ''Increasingly, broker-dealers have been turning to the third market for execution of orders in stocks listed on exchanges,'' says Homer Livingston, president of the Chicago Stock Exchange.

''Most third-market transactions are done upstairs at firms that just send the exchange a report of the trade,'' said another exchange executive who also requested anonymity.

The US Stock Exchange will offer third-market players many of the safeguards and regulatory assurances of traditional exchanges, the executive said.

Some securities firms are ''not particularly thrilled about doing it where they are doing it now, and they would like something that is more regulated,'' he says.

Firms active in the third market have become keenly aggressive. Some firms that specialize on high-volume executions buy ''order flow,'' or solicit buy and sell orders from brokers by offering them a small per share commission.

The exchange would not take business from its parent, the Chicago Stock Exchange, but from other third-market entities, says the exchange.

The US Stock Exchange would electronically line up execution orders, completing the highest-price buy orders and lowest-price sell orders first. It would be the only exchange in the country guaranteeing ''price improvement,'' or offering a buyer or seller a more favorable price when the spread between the buy and sell price exceeds one-eighth of a point ($1), according to the Chicago Stock Exchange.