hope everyone had a great weekend... red herring article about taking the nyse public mentions mer and their investment in primex electronic trading network...
The NYSE faces the public
By Sarah Stirland
Redherring.com
September 4, 1999
It was a remarkably muted event, given its historic nature. Late last Thursday at the New York Stock Exchange, two men strolled into a narrow carpeted room with portraits of important-looking men lining the walls. They picked their way through a crowd of reporters and sat down on two stools in front of a backdrop plastered with the logos of NYSE and www.nyse.com. Unlike media events held by Nasdaq, there wasn't much fanfare, and there were no flashy banks of television screens. Not even a press release -- just two men sitting on a couple of stools in front of a bunch of reporters and photographers in a back room at the NYSE.
The two men, of course, were Dick Grasso, the NYSE's chairman and CEO, and Billy Johnston, the exchange's president and chief operating officer. They were there to announce that the board of the NYSE had given them approval to embark on the process of taking the exchange public by sometime next year. move to become a publicly traded corporation marks a significant turning point for the exchange. It is an acknowledgment of all the changes network technology and globalization have wrought in the securities markets. The NYSE's moves will be a fascinating story to follow over the next couple of years. Mr. Grasso will be an especially interesting figure to observe as he carries out the historic task of shepherding the 207-year-old member-owned behemoth into a new era and into a new way of operating. If Mr. Grasso can coax all of its members to agree to trade in their memberships for shares in the exchange, he'll end up paying the ultimate tribute to the way business is conducted at the end of the twentieth century: build a business, add a dot-com, and take it public.
NO MORE COUNTRY CLUB
In discussing the exchange's motivations last Thursday, Mr. Grasso bluntly acknowledged the transformative power of the Internet, the growing competition both domestically from the electronic trading networks and from foreign exchanges, and the difficulties he might face as he tries to ready the NYSE for these challenges.
"In a very fundamental sense, what the Net has done is flatten the separation between the consumer and the producer. Whether you are selling stocks or selling books, there is a value-chain question that needs to be asked. Intermediation: Where does it bring value? Where is it commoditized? We have got to look at our business in that broad sense ... [and] it's forced us to look at the institution in a very different way," he said. "You ask yourself, How quickly can you be displaced?"
While these words may seem obvious by now to the rest of the world, the mere fact that Mr. Grasso dared to utter them in public and to suggest that the NYSE might need to alter its business model is a step forward. In previous public talks, Mr. Grasso had always skipped over the nature of network technology and instead emphasized the efficiency of the trading model at the NYSE, stressing that the NYSE auction model was a proven, successful one that needed no alteration. By discussing the exchange's proposal to go public, Mr. Grasso was not only acknowledging what the exchange's critics have said about efficiency, he was also directly addressing their complaints about how the exchange was run like a country club, with vested interests that prevented it from moving quickly and competitively in an increasingly cut-throat environment.
"Under the present structure, the members get to vote on every decision made at the exchange -- this new structure would give it more flexibility," says William Freund, professor of economics and director of the Center for the Study of Equity Markets at the Lubin School of Business, at Pace University in New York City.
As an example, Mr. Freund points out that members have to vote to approve even the smallest operational issues. A couple of years ago, for instance, the exchange wanted to open half an hour earlier, but had to receive approval from all of its members, he says.
Even some of its own constituents agree that their club has to change. "Doing the IPO would allow them greater flexibility because they wouldn't be controlled by their members -- it would become a corporation that could react in a split second to competition and to the ECNs (electronic communications networks)," says one NYSE floor broker who has worked on the floor for 15 years, and who asked that their name not be used.
EXCHANGE OF PLANS
So where's the competition? Mr. Grasso pointed out that so far, the New York Stock Exchange has been doing very well, even if it is more labor-intensive than its competitors. But as he said himself, that's no guarantee of where the exchange will be in a few years, when the rival electronic networks that have filed for exchange status start trading NYSE-listed stocks and listing new companies. So far, the networks that have applied are: Island ECN, NexTrade ECN, and Archipelago. A third of Nasdaq already trades on nine ECNs altogether, with much of the action occurring on the largest electronic network, Reuters's (Nasdaq: RTRSY) Instinet.
Although competition on the international front isn't as immediately obvious, it's hard to predict what will happen down the road. What is clear is that if the foreign exchanges try to muscle in on the NYSE's turf, some would be able to make faster decisions than the NYSE if the exchange remained a member-owned organization. That's because an increasing number of exchanges around the globe have gone or have plans to convert themselves from member-owned institutions to for-profit corporations. The OM Stockholm Exchange, which is now owned by the Swedish financial technology firm The OM Group, is already public, and so is the Australian Stock Exchange, which went public last year. And this July, London Stock Exchange announced that it has plans to demutualize -- after the competing electronic for-profit British Tradepoint Stock Exchange relaunched earlier this year. Of course, Nasdaq, the NYSE's biggest competitor, has already embarked on preparing for its own conversion and IPO.
But as Mr. Grasso pointed out, a plethora of questions need to be answered before the world's largest stock exchange decides to join the ranks of publicly traded firms. As has been widely reported, there is the question of regulation: Should the NYSE regulate itself, or should its regulatory unit be spun off? How will members of the NYSE be taxed on their windfall once the exchange issues them shares? How will the exchange be able to reassure investors that the conversion won't affect the quality of the market? How will the capital-raising process be affected?
While finance professors agree that the NYSE's conversion to a public corporation will probably have a negligible effect on the IPO process and new listings, Carl Johan Hogbom, the president of the OM Stockholm Exchange, says that going public has made that exchange focus more on fostering a trading environment that ensures liquidity in a company's stocks -- something that is important because it lowers the cost of raising more money for the firms. Going public hasn't made the OM Stockholm Exchange lower its listing standards, however, Mr. Hogbom says. It's unclear whether the NYSE will change its own listing standards after it goes public. Currently, its listing standards are far stricter than Nasdaq's.
VOTING WITH THEIR WALLETS
If the NYSE management overcomes the many hurdles it faces, the historic conversion of a phenomenally successful U.S. institution will reverse the lines of power and radically change the way the NYSE operates: for the first time in its history, the NYSE will be subject to exactly the same business pressures as the companies traded on its floor are subjected to. Next year, Mr. Grasso will have to convince the 1,366 seat holders that this is a transition that they want to go through.
To an extent, some of the members have already voted with their investments in the ECNs. The most potent example is Goldman Sachs (NYSE: GS) and Merrill Lynch (NYSE: MER), which have already teamed up with a traditional NYSE rival by buying stakes in Primex, a new electronic trading network set to go live next year. The system will attempt to replicate the NYSE auction-style trading process electronically.
Whatever happens, the biggest changes in the process will be for the exchange members themselves. The specialists and two-dollar brokers, many of whom have worked on the exchange floor for generations, will be transformed from being members of an exclusive 207-year-old trading club to being ordinary -- albeit powerful -- shareholders in an unusual corporation. And the NYSE, derided and predicted to die an imminent death for the past two decades by automation diehards, may defy these predictions and actually become even more powerful than it already is if it goes public. That's because it could use its stock to buy an ECN and to hire top talent, says Mr. Freund.
"The NYSE will become more nimble and savvy," he predicts.
New York Stock Exchange
Island ECN
NexTrade ECN
Archipelago
Instinet
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