Venerable NYSE must cope with rapid change
By Michael J. Martinez
Associated Press
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 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, even about its corporate structure, and what that should be.
It continues to battle competition from the Nasdaq Stock Market and other 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. 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 to eventually go public.
"The New York Stock Exchange has always been in a unique position with it's product, visibility — the cachet, if you will," said Tom Caldwell, chairman of Caldwell Asset Management Inc., 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.
Electronic markets such as the Nasdaq 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 trade on the exchange, the rest are 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 American 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., perhaps even before that.
The exchange also is looking at trading a variety of other investments besides stocks. The NYSE is currently 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 believe that the NYSE, despite the inroads of its rivals, dominates U.S. stock trading.
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 nation's 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 extreme 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.
April and the months ahead will bring more changes at the NYSE. Interim chairman John Reed, the former co-CEO of Ci-tigroup, is expected to step down from the board of directors.
"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."
