Over the past two years, the New York Stock Exchange has been most notable to the public for a single incident — the $187. 5 million pay package...
NEW YORK — Over the past two years, the New York Stock Exchange has been most notable to the public for a single incident — the $187.5 million pay package given to former Chief Executive Officer Richard Grasso.
Putting that controversy behind it is one of several critical issues facing the NYSE — it’s also contending with questions about how it operates, and even about its corporate structure.
It continues to battle competition from all-electronic markets, working toward creating its own electronic trading system while also trying to appease constituents who prefer the exchange’s 213-year-old tradition of human brokers negotiating prices on the trading floor.
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Meanwhile, seat owners, the NYSE’s version of shareholders, have seen their stake in the NYSE dive in value, and some are pushing for the not-for-profit institution to not only become a for-profit enterprise, but also to go public.
“The New York Stock Exchange has always been in a unique position with its product, visibility — the cachet, if you will,” said Tom Caldwell, chairman of Caldwell Asset Management, a seat holder and frequent critic of the NYSE. “It’s in a very good position, but it’s been assaulted on many, many fronts. The world of exchanges has changed dramatically. It’s a very competitive business now.”
New CEO John Thain and other NYSE officials are faced with expanding the exchange quickly enough to meet the demands of a rapidly changing global stock market while managing the different interests that make up an institution that is nearly synonymous with American capitalism.
A quick look at the chief executive of the NYSE.
Education: Bachelor of Arts degree, Massachusetts Institute of Technology, 1977; Master’s of Business Administration, Harvard University, 1979.
Experience: Served in a variety of executive positions at Goldman Sachs Group from 1994-2003, including chief financial officer, president and co-chief operating officer. Chief executive, New York Stock Exchange, January 2004-present.
Source: The Associated Press
Inroads of rivals
Electronic markets such as the Nasdaq Stock Market and overseas competitors have eroded the NYSE’s hold over its listed companies. While about 80 percent of the daily volume of NYSE-listed stocks actually trades on the exchange, the rest is traded electronically around the world, sometimes long before or after the exchange’s 9:30 a.m. to 4 p.m. Eastern time operating hours.
Exchange officials also fear losing market share in the trading of foreign-company stocks listed on the NYSE. The exchange trades foreign companies as American depository receipts, or ADRs, a kind of promissory note.
In the past, ADRs gave U.S. investors the only opportunity to own stock in foreign companies. Now, thanks to electronic trading, it can be easier for investors to simply buy foreign companies in the companies’ home countries. In a 24-hour news cycle, when European companies announce earnings, for example, in the middle of the night in the United States, investors see the chance to get in on a European stock well before the NYSE opens.
Thain sees an opportunity for more business and market share if the exchange were to open earlier — perhaps 8:30 a.m. Eastern time, perhaps even before that.
“A fair amount of trading goes on outside our hours,” he said recently at a meeting with reporters. “We can add value by opening earlier, because the prices that occur now in pre-market trading aren’t as good or consistent as we can provide.”
The exchange is also looking at trading a variety of other investments besides stocks. The NYSE is home to a few exchange-traded funds — baskets of stocks that resemble mutual funds but are traded like stocks — and Thain has discussed expanding that effort to options and futures contracts based on its listed equities.
It’s still a big adjustment for many at the exchange who think that the NYSE, despite the inroads of its rivals, dominates U.S. stock trading.
The Grasso debacle
Grasso has his critics and defenders at the exchange but ask most people about him, and they’ll simply smile, shake their heads and do their best to talk about something else.
Few, however, debate that the NYSE grew under Grasso. He had a deft hand in dealing with the NYSE’s multiple constituencies, kept regulators at bay and had the support of traders on the floor, where he started as a clerk in 1968.
His handling of the NYSE after the attack on the nearby World Trade Center on Sept. 11, 2001, helped restore confidence in the economy and drew praise from then-Mayor Rudolph Giuliani and other national figures.
But revelations about Grasso’s pay package, approved in August 2003, and his resignation a month later made him a figure of controversy. His departure created major fault lines of opinion among the NYSE’s constituents. Some maintained Grasso was an effective leader and deserved the money. Others felt he kept the NYSE in limbo, failing to move quickly enough to change in the face of heated competition.
Regardless of the opinions, the NYSE added a new problem to its list of worries. The general public saw the Grasso debacle as another in a long line of corporate scandals, and the NYSE’s image suffered.
A hybrid system
The exchange has also faced a severe regulatory challenge — the Securities and Exchange Commission’s revamping of the nation’s market system.
Regulation NMS (National Market System), which could be approved in the next few weeks, would require stock traders to accept the best bid or offer available, no matter which stock exchange or market posted the bid or offer. However, customers could choose to opt out if they want to simply execute the trade as quickly as possible — a benefit to all-electronic exchanges and a blow to the slower floor-based system at the NYSE.
The SEC also proposed a change that could weaken the NYSE further, allowing computerized exchanges to trade its stocks freely, while forbidding the slower NYSE from trying to steal market share back from the electronic upstarts.
In response to the SEC’s efforts, as well as customer complaints about the relative lack of speed in NYSE trades compared to all-electronic competitors such as the Nasdaq Stock Market, the exchange is poised to introduce a new “hybrid market” system, in which electronic trades can be made quickly alongside the NYSE’s specialist-auction system.
The electronic trades would match bids to buy stocks and offers to sell stocks quickly when the bids and offers matched, allowing orders to be processed without having to go through floor brokers. However, the specialists would still have the opportunity to work trades with larger spreads between bids and offers, bringing buyers and sellers together at levels they could live with.
“When there’s a 15- to 20-cent spread, it’s probably better to send that order to the floor so that the specialists can help close that spread,” said Robert Britz, president and co-chief operating officer of the NYSE. “But for those who simply want speed because that suits the nature of what they do, whether they’re day traders or whatever, we’ll offer that as well.”
The hybrid system will most likely allow the NYSE to compete with all-electronic markets once Regulation NMS passes. However, nobody at the exchange can say with certainty what the impact of the hybrid market will be on the NYSE floor. Certainly, more of the exchange’s daily volume will be traded electronically, but whether that will affect the jobs of traders on the floor remains to be seen.
Thain’s first year
Into the void left by Grasso walked Thain — reserved, unassuming and practically the antithesis of the ebullient, charismatic Grasso. A former top executive at Goldman Sachs Group, few envied Thain the situation he inherited in early 2004. Succeeding Grasso, with the NYSE’s constituents still sharply divided over his legacy, would have been hard enough, but all the other issues complicated the job.
“For all the complaints people have about Grasso, he managed to keep the NYSE’s market share very high, seat prices were very high, he won lots of listings, and staved off demands for a more automated market,” said Charles Jones, associate professor of finance and economics at the Columbia School of Business. “All of those things, Thain has confronted head-on. He’s moving forward on how to automate the market, respond to threats from other automated exchanges. He’s facing issues head-on.”
Many traders, seat owners, specialists and the NYSE’s brokerage customers all praise Thain after his first year, even if they disagree with his ideas or simply preferred Grasso’s leadership. Thain is known for listening and considering all opinions, then weighing things carefully before making a decision — a big change from Grasso’s autocratic ways, according to a number of people at the NYSE.
The controversies and uncertainties have taken a toll on the owners of the exchange, those who hold the seats. Owning a seat carries the right to buy and sell stock on the exchange. Since the NYSE allowed seat owners to lease those trading rights to others in 1978, the seats have become investments more than anything else, allowing retired owners to live off their lease income.
At least until recently. The sales price for a seat has fallen from $2.65 million in 1999 to as low as $975,000 in January.
More important, seat owners’ annual leasing income — the amount brokerages and traders pay them to use their seats to trade on the floor of the exchange — is said to be as low as $60,000, down considerably from the $250,000 to $350,000 seen in the late 1990s.
The NYSE became a not-for-profit organization in 1971 and thrived as such until the past few years, when seat prices began to drop and owners began to question whether its nonprofit status was holding the exchange back.
Now, seat owners have started calling for the exchange to turn for-profit, allowing the NYSE to become more nimble in making acquisitions and otherwise expanding its business.
“It has to think like a business in order to compete with other businesses,” said Caldwell, one of the more vocal seat owners. “This is the time for the exchange to think about what it wants to be and, hopefully, become a for-profit enterprise so it can better compete.”
Caldwell would also like to take the exchange public. While still in the minority, a growing number of seat owners, faced with shrinking returns on their NYSE investments, think an initial public offering would restore their recent losses — and then some.
Of course, becoming for-profit would mean changes for the specialists and floor traders working at the exchange. Thain, who heads a working group that is exploring making the exchange for-profit, said some of the expenses the NYSE absorbs could be passed on to those working on the floor.
“There are certainly negatives to this that haven’t been talked about,” Thain warned. “We have to address the pros and cons equally. And going public is a much farther step down the road.”
The working group is scheduled to report to the NYSE board next month. The NYSE won’t say whether the board will be prepared to make a decision on its not-for-profit status at that time.
More changes ahead
The months ahead will bring more changes at the NYSE. Interim chairman John Reed, the former co-CEO of Citigroup, is expected to step down from the board of directors. Regulation NMS will probably be approved, along with the NYSE’s hybrid market plan. And the exchange could open an hour earlier by summer.
“I think the NYSE is moving faster, as fast as it’s able, at least. John Thain sees the writing on the wall,” said Vincent Phillips, chief executive officer of CyberTrader, a Charles Schwab Corp. subsidiary serving active online traders. “I would still push for more and much faster automation. That’s where the growth is.”