Monday, October 03, 2005

Changes at the NYSE?

I hope everybody at least has kept an eye on this. Over the summer, the New York Stock Exchange (NYSE) announced a mind-blowing two-part plan: (1) acquire the automated Archipelago Exchange and (2) ditch its non-profit status and go public. The elder statesman of the stock exchange industry's plan is radical, despite the fact that the NYSE is a bit late to the party.

The NYSE has long labored under the "specialist" model, which relies on a human intermediary for all stock transactions on the Exchange floor. The result is suboptimal trade execution, a reliance on a restricted trading day (9:30 AM to 4:00 PM), and a higher cost of trade execution that ripples through the brokerage industry.

Most observers took the Arca merger as a sign that things were about to change at the NYSE. The acquisition of a prominent automated exchange could only mean that the NYSE was considering a move from the dated specialist trading model.

It would be about time. Seriously.

The NYSE's primary competition, NASDAQ, operates exclusively in an automated fashion, and most of the regional exchanges (Phily being the most recent) have headed in this direction as well.

The NYSE's notion of going public is also not unusual, as the CBOE is in the process of doing so. A public offering and abandonment of non-profit status also would alleviate many of the NYSE's recent problems around executive compensation.

Of course, revolutionary changes breed discontent. The NY Post reported last week that a NYSE member lawsuit against the exchange continues to recruit participants from among the membership. The old guard, it seems, is comfortable with the status quo.

The absurdity of this position cannot be overstated.

The relevance of the NYSE will recede if changes do not occur soon. As automated trading platforms gain momentum, the only advantage the NYSE has in retracting listing companies is prestige. Prestige, though, does not compare to more advantageous trade execution and more reasonable bid/ask spreads.

The iconoclasts will have their day! The NYSE must adapt or fade into irrelevance (i.e. become a closer cousin to the American Stock Exchange).

Tom Johansmeyer


Anonymous said...
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Jack Payne said...

Late to the party is right. I still marvel at how many practices of the NYSE are steeped in the 19th century.

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