Under the deal Morgan Stanley will invest $7.5 million for 10% of the total shares outstanding in the Philadelphia exchange. Citigroup, Credit Suisse First Boston and UBS will each invest $3.75 million for five per cent stakes.

The four banks also acquired warrants to boost their combined stakes in PHLX to nearly 50%. If the exchange meets certain performance criteria, Morgan Stanley can increase its stake to 19.9%, while the remaining three banks can increase their stakes to 9.9%.

Merrill Lynch and Citadel Derivatives acquired ten per cent stakes in PHLX in June for a rumoured $7.5 million apiece. Both firms also have an option to increase their investments in the future.

Together the six financial services firms could eventually own 89.4% of the exchange if all warrants are fully exercised.

In a statement, Meyer Frucher, chairman and CEO of the PHLX, says: "We expect that all six of our strategic investors will achieve their performance criteria and will be entitled to exercise their warrants in full as of June 30 2006."



The exchange went from a member-owned organisation to a private, for-profit company last year but has failed to increase market share and still lags behind the American Stock Exchange, the Chicago Board Options Exchange and the electronic International Securities Exchange. In stocks, PHLX has less than one per cent of the activity listed on the Nyse.

PHLX currently trades options, stocks and currency futures but says it plans to expand its futures business.

Frucher says the new investments will help the exchange "become a strong new competitive force in the rapidly consolidating securities exchange marketplace".

"Our long-term objective – to offer multiple product classes traded in one venue, at a competitive cost - will ensure that the investing public is not captive to the forces of market centre convergence," adds Frucher.

PHLX says it is also planning a share buyback offer for its original shareholders, allowing them to tender shares for $900 each. It intends to offer to repurchase up to 16,700 shares of class A common stock.