Smell that? Something reeks on Wall Street
By Al Lewis, Denver Post Business Editor
Looks like they're finally peeling the musty onion that is the New York Stock Exchange.
The first layer is a board of directors largely composed of the captains of Wall Street's top brokerage firms. They manage a machine that is supposed to oversee their companies' trading activities - a form of self-regulation that is increasingly oxymoronic.
The next layer is the chairman, or former chairman, Dick Grasso, whose career went down in flames last week over his controversial retirement benefits, which grew to $187.5 million over about five years without much disclosure.
Not a crime, but not very smart in an era of widespread disenchantment with executive greed and thin disclosure. Also, the fact that NYSE board members approved Grasso's pay creates questions about their alleged self-regulation.
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"The current system is not aligned with the interests of shareholders," said Jack Ehnes, a former Colorado insurance commissioner who heads the California State Teachers Retirement System.
Ehnes, whose organization trades $32 billion worth of stocks each year on the NYSE, jestingly recalls a white paper by the exchange that referred to shareholders as the ultimate constituency.
"If we are the ultimate constituency, why don't we have any seats on the board?" he asks.
The board on Sunday named a new chairman, former Citigroup Inc. chairman John S. Reed, who will work for $1. But he only is taking the job until someone more willing emerges. Several executives already have turned down the job, including Larry Sonsini, CEO of law firm Wilson Sonsini Goodrich & Rosati. Probably a wise move for him.
Peel a few layers down from the board and the acting chairman and you will find a core of so-called specialists who run the exchange by matching buyers and sellers of stocks in a live auction.
Specialists have special powers. They know all the buyers and sellers of a given security and where their trading thresholds lie.
"It's akin to playing poker in a room full of mirrors," explains Frank Birgfeld, a former district director of the National Association of Securities Dealers and now a consultant in securities cases. "The specialist knows what's in everybody's hands."
Byzantine rules govern specialist trades so that their inside information doesn't grossly disadvantage others.
For instance, specialists are not supposed to trade their own stocks ahead of the large, price-inflating orders of others - a lucrative practice called front-running. And they are not supposed to take first crack at a trading opportunity when there are other orders pending - called trading ahead.
To extend the poker metaphor: Specialists are allowed to see everyone's cards, and they are expected not to cheat.
And what's to prevent them from cheating? Why, the NYSE, run by a board of specialist-using brokerage titans and a pocket-stuffer named Dick Grasso.
This is why the U.S. Securities and Exchange Commission reportedly is digging into trading practices at the exchange. The Wall Street Journal, which uncovered the career-toppling news of Grasso's compensation, on Monday quoted an unnamed source saying the NYSE investigation was a huge priority for the SEC.
Grasso was an austere supporter of the specialist system. With him gone, and federal regulators on the trading floor, this 211-year-old model may be nearing its end.
"This is a big investigation," said Junius Peake, a finance professor at the University of Northern Colorado and former regulator. "And I don't know whether the specialist system will be able to survive."
Keep the hankies handy. Lots of teary eyes to follow as they peel the onion to pieces.
Al Lewis' column appears Sundays, Tuesdays and Fridays. |
