NYSE considers IPO, buybacks
Electronic trading, scandals, threaten iconic market
By David Weidner, CBS.MarketWatch.com
Last Update: 12:26 AM ET Aug. 11, 2004
NEW YORK (CBS.MW) -- Amid one of the biggest crises of confidence in its 212-year history and facing relentless competition from electronic rivals, the New York Stock Exchange is pondering drastic changes to its ownership structure, including a sale to the public or a buyout of up to a quarter of its current shareholders.
The proposals come as the value of an NYSE seat hits a five-year low and stocks of floor specialists LaBranche (LAB: news, chart, profile) and Van der Moolen (VDM: news, chart, profile) have fallen to 12-month lows.
And, with the Big Board about to open up its system to large electronic trades, the exchange's current owners, 1,366 shareholders -- called seatholders -- are faced with shrinking prospects for a return to the easy profits and cachet long associated with owning a spot on the raucous floor.
The declining fortunes were hastened last week when Big Board CEO John Thain unveiled a plan to allow big blocks of electronic trades to "sweep" through the market; a move that many believe will steer trading, and profits, away from the human specialists and brokers. See full story.
The question is, should the NYSE continue its march toward modernization or should it hold onto its unique open-outcry auction system.
And, as with most issues facing the exchange since Dick Grasso was ousted nearly a year ago, there is little consensus
The specialists and floor brokers are facing a scenario that was inevitable because of the financial efficiency found in electronic markets, some experts say, while others acknowledge the traditional role of a human intermediary.
"It could be the beginning of the end for them [the NYSE]," said Michael Goldstein, a former visiting economist with the NYSE, now an associate professor with Babson College. "Their real advantage right now is that they actually involve a human being."
Goldstein believes the NYSE would lose its reputation as the best market for companies because electronic trades are believed to create more volatility in the market. About 10 percent of trading on the NYSE is done electronically, but that number could swell significantly under the proposal.
A buyback
William Higgins, who leases his seat on the exchange, has proposed buying back as many as 366 seats. Under the plan, owners would be paid $1 million each -- below the current value -- effectively placing a floor on a seat's value.
Higgins could not be reached for comment. And a spokesman for the NYSE declined comment. But the plan is being considered, according to exchange officials familiar with it. So far, legal issues are being studied.
"With abundant reserves, to shrink the amount of seats when there's an overhand in supply is just good market economics," said Robert Fagenson, vice chairman of Van der Moolen USA and former member of the NYSE board under Grasso.
But Fagenson also believes the issue is not as critical to long-term so-called "owner-users" as it is to owners who lease their seats. A reduction in price for a seat generally lowers the fees an owner can extract from a lessee.
Indeed, much of the NYSE more entrenched members aren't discussing a buyback.
"Right now people are more focused about stabilizing the business model," said Robert McCooey, a floor broker and member of the NYSE's executive committee.
But a buyback may not be a bad idea, says Babson's Goldstein. He likened it to taxi permits. Should ridership fall, less taxis are needed and the number of permits could be cut back to ensure the value of those still in use.
"Management has to say 'we just don't need that many people,'" he said.
In the interim, the NYSE and Securities and Exchange Commission may consider lowering the capital requirements for specialists. Those firms must keep cash on hand to buy or sell shares to reduce volatility. With less trading moving through the specialists' books, less cash would be required, Goldstein said.
IPO
An initial public offering of the exchange has been floated at times over the NYSE's past two centuries. Most recently, the exchange under Grasso considered going public in 1999 and was on track for months before the board nixed the plan at the last minute.
Now, Thain said the NYSE will revisit an IPO in the next six to 12 months. By then, members hope that some of the doubts about the NYSE's course will be answered.
"As an owner operator, I want a big payday at the end, as I think most people would want," McCooey said. "But at the same time I want the market to function where customers can come and get their business done and I want to make a living."
A clear threat
And judging by the value of seats on the exchange, waiting may be the best strategy.
Last week, three seats on the NYSE were sold for prices ranging from $1.25 million to $1.35 million, the Big Board said late Tuesday. The low price represents a five-year low.
The current bid for a seat on the exchange is $1.11 million. The offer price is $1.3 million, the NYSE said. The sale prices have been on the decline since the summer of 2003 when seats generally fetched $2 million before Grasso resigned. The record sale price was $2.6 million in 1999.
The declining values amid the reforms have put pressure on NYSE management.
"Thain is doing as good a job as I think anybody could possibly do in his situation, and the situation is one of massive compromise," said Seth Merrin, chief executive of Liquidnet, a five-year old company that matches institutional buyers and sellers outside of the NYSE system.
"What he's doing is actually a positive for his constituents, but paradoxically, he's not pleasing anyone," Merrin said.
Merrin believes Thain has to move the NYSE toward an electronic platform and probably would make it completely electronic except for the deep impact it would have on specialists and floor brokers.
He said Thain supported full electronic systems when he was president at Goldman Sachs (GS: news, chart, profile). And the NYSE isn't going far enough to entice customers away from all-electronic rivals such as Nasdaq (NDAQ: news, chart, profile) and Archipelago (AX: news, chart, profile), Merrin contends.
"He has to deal with the owners who are completely at odds with the customers," Merrin said. |
