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NYSE expected to go public - and roar into electronic trading

The plan gets voted on Tuesday. Will human floor traders still be necessary?

by Miriam Hill
Publication: Philadelphia Inquirer

December 4, 2005


NEW YORK - In a world where a harried investor can sell a stock in a fraction of a second over a computer, is there any need for an institution that still relies on humans scurrying about shouting buy and sell orders?

The threat that technology poses to human labor looms large in a vote Tuesday on whether the New York Stock Exchange should sell shares to the public. The outcome is all but a foregone conclusion. Exchange members are expected to approve the deal.

Even so, the vote symbolizes vast change in the world's investing markets. As part of the plan to convert from a nonprofit, member-owned institution to a for-profit corporation owned by the public, the NYSE plans to acquire one of its all-electronic rivals, Archipelago Inc.

Ten years ago, Archipelago did not exist. But since it began operating in 1997, Archipelago and other electronic exchanges, including the better-known Nasdaq, have gobbled up chunks of what once was a near monopoly for the New York exchange. Now, the NYSE fears losing dominance. Its electronic rivals, once inconsequential upstarts, have become big competitors.

"The New York Stock Exchange is yesterday's newspaper, essentially, in terms of its trading technology," said Junius Peake, a finance professor at the University of Northern Colorado.

Dave Humphreville, president of the Specialist Association - which represents stock-exchange members known as specialists, who are charged with maintaining orderly trading in specific stocks - disagreed.

"People come to New York for a reason," he said. "We are by far the most technologically advanced exchange on the planet today," he said. Technology is not driving the Archipelago deal, he said. The NYSE wants Archipelago because it gives the exchange new products to trade, he said, and offers a simpler route to becoming a public company.

The race to offer the fastest, cheapest trading system has set off a bull market in investments in financial exchanges. Going public is one way to raise capital for expensive technology investments.

Shares in Nasdaq Stock Market Inc. closed Friday at $42.28, up 314.5 percent so far this year. The Chicago Mercantile Exchange, once a clubby, member-owned institution, went public three years ago. Its shares closed Friday at $369.80, up 62 percent this year. Archipelago shares, closing Friday at $58.86, have climbed 181 percent in the same period.

This summer, Citigroup Inc., Merrill Lynch & Co. Inc. and several other prominent investment companies bought stakes in the Philadelphia Stock Exchange, in part to get a piece of an electronic system that could compete with the NYSE and Nasdaq.

Current owners of the New York Stock Exchange are known as seat holders, a term that stems from its early years, when members sat in seats during a roll call of stocks. Seats are bought and sold privately. When the exchange goes public, seat holders will receive $300,000 in cash plus 80,177 shares of common stock in the combined NYSE/Archipelago, which will operate as a new company, NYSE Group Inc.

The runup in Archipelago shares has pushed the price of a NYSE seat from $975,000 earlier this year to a record $4 million last week.

People once bought NYSE seats as symbols of prestige to complement their degrees from Harvard or Yale, whether or not they planned to trade there. But those days faded long ago as the bull market and technology sped up the pace of the trading floor.

NYSE executives say the floor and its human traders offer a way to centralize information that ultimately leads to more profits for investors.

But some experts ask whether the floor is a relic in an era of computers. They question whether the NYSE has been slow to change because traders do not want to give up the collegiality of close quarters on the floor.

"Many people wondered why the New York Stock Exchange hasn't moved faster on this," said Richard Sylla, an economics professor at New York University. "It's the culture. They like to see each other every day."

But technology threatens to destroy a culture where trades depend on humans. Paul Schultz, a finance professor at the University of Notre Dame, whose research led to reorganization of the Nasdaq market, estimated that a NYSE trade could take as long as 10 seconds to execute, compared with a fraction of a second on an electronic exchange.

In a rapidly shifting market, those seconds mean big money to traders, he added.

No one is sure what increased electronic trading, along with coming regulatory changes, will mean for the NYSE's human traders.

When the London Stock Exchange modernized in 1986, the trading floor disappeared within a week, replaced entirely by computers, Peake said. The revolutionary change became known as the Big Bang.

The Chicago Mercantile Exchange, on the other hand, has expanded computer trading, but still maintains an active trading floor.

Jim Rutledge, who owns a NYSE seat, said the exchange had been adding electronic-trading capability for several decades. In the past, he said, he and others worried that more electronic trading would hurt business. Instead, it helped, because it improved trading volume.

"My business went up," Rutledge said.

Humphreville said his members were concerned about increased electronic trading, but he believed specialists would continue to play a strong role: They provide benefits, such as better prices for investors, that are unavailable from a computer.

"Specialists have a unique role in bringing buyers and sellers together efficiently and adding liquidity to the market," he said.

No one knows how the change will affect individual investors, either.

Meyer "Sandy" Frucher, chairman of the Philadelphia exchange, said he believed the outcome of all the changes would be positive.

"Competition has been very good for investors because it has both narrowed spreads on the trading side and it has certainly lowered costs," Frucher said. A spread is the difference between the price an investor is willing to pay for a stock and the price at which someone else will sell. Smaller spreads mean investors get to keep more of the profit from a trade.

But Muriel Siebert, the first woman to own an exchange seat in New York and the head of the discount brokerage firm that bears her name, fears that the new NYSE will try to shift costs from larger investors to smaller ones. Already, rumors are circulating that the NYSE plans to raise fees.

NYSE spokesman Rich Adamonis said no decisions had been made yet about fees.

"There's a lot of questions that are not answered in my mind," Siebert said. "If they're going to try to rip off the small investor... I'm going to get very angry about it."

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