FOCUS-NYSE's Grasso sees new rivals, ECN shakeout
By Elizabeth Smith
NEW YORK, Jan 20 (Reuters) - The New York Stock Exchange may face its toughest competition in
the coming years from Internet companies such as America Online Inc. <AOL.N> or Yahoo! Inc.
<YHOO.O>, NYSE Chairman Richard Grasso said.
As the exchange focuses more on the collection and distribution of financial data and less on the actual
business of stock trading, it has more to fear from powerful, cash-flush Internet companies than from
the Nasdaq stock market or upstart electronic trading networks, he said.
"The fundamental business is moving toward financial data, with NYSE against Yahoo or eBay," said
Grasso with reference to the leading Internet auction site eBay Inc. <EBAY.O>
"Players we don't see in the space yet will be the ones to worry about," he said in an interview held in
his spacious sixth-floor office at the exchange at Broad and Wall streets.
The NYSE, viewed as a citadel of American capitalism, will not face its ultimate competition from the
so-called electronic communications networks, or ECNs, because they will be subsumed by the Internet
giants, Grasso predicted.
ECNs, systems built out of computers and servers, automatically and electronically match orders
placed by brokers. With no major infrastructure or trading floor to support, these upstarts match stock
orders more quickly and cheaply than traditional exchanges.
As a result, they are quickly becoming trading alternatives to established exchanges. They account for
close to 30 percent of daily volume on the Nasdaq, the No. 2 U.S. stock market. ECNs are now
looking to go up against the NYSE, which still dominates the trading of stocks listed on the
207-year-old exchange.
The NYSE's recent decision to scrap Rule 390, a high-profile obstacle to trading listed stocks, and a
plan to open up the system through which U.S. exchanges talk to each other, will make it easier for
ECNs -- include Reuters Group Plc's <RTR.L> Instinet Corp. unit -- to take on the NYSE.
But Grasso thinks the bigger ECNs will ultimately buy out their smaller counterparts. "There are nine
ECNs today," Grasso said. "Those nine ECNs will become two or three."
They will then be absorbed by new rivals, such as the Internet companies, who aren't in the business
yet, he said.
Despite the expectations of an ECN shakeout, the Big Board is continuing to build similar systems to
stave off its competitors.
Grasso first talked about the NYSE's plans for an ECN in October at a Securities Industry Association
conference in Boca Raton, Fla. He told reporters and industry executives that the electronic platform
would be designed to execute retail investor orders of 1,000 shares or less.
But the NYSE is also building a share-order matching system that will pair up small institutional investor
orders of up 25,000 shares.
The NYSE's ECN, still under construction, will automatically execute orders of 1,000 shares or less for
retail investors by July, Grasso said.
Floor brokers at the exchange will key orders into the ECN through wireless, hand-held devices. The
Big Board will also use its ECN as a platform to launch an after-hours stock trading session later this
year.
The NYSE will then launch "i eXpress," its share-order matching system for institutional investors, in
early 2001, Grasso said. "We are an electronic market and we are an open outcry market," he said.
"Those are the polarities and we have many graduations in between those two extremes."
A committee, co-chaired by former Ford Motor Co. Chief Executive Alex Trotman and Clifton
Wharton, once chairman of TIAA-CREF, will report to the NYSE's board on market structure by the
end of the first quarter. It will then focus on whether the NYSE should convert to a publicly traded
company.
The 53-year-old Grasso also said he was still undecided about whether the NYSE should launch an
initial public offering, saying he still saw benefits to staying private. Grasso first floated the idea of a
publicly traded NYSE last summer but he has backed off from the idea since then.
"I'm leaning both (ways)," Grasso said when asked where he stood on the issue. Pressure from Wall
Street analysts who exert enormous influence over publicly traded firms would limit what the Big Board
could do, he contended.
For example, the exchange can currently build systems with five times the peak capacity as insurance to
withstand market turbulence. A shareholder-owned company would be on the grill for having so much
excess capacity, Grasso explained.
But on the flip side, the NYSE would be able to tap pools of capital it could not reach today, he said.
The tradition-bound NYSE is still a members-only, private institution.
Grasso hesitated when asked if he could foresee the NYSE eventually merging with its archrival, the
Nasdaq. "It's a great question," he said smiling. Grasso said he would never structure any IPO of the
NYSE that would prohibit such a merger from transpiring. He smiled some more.
((Elizabeth Smith + Wall Street Desk 212-859-1891))
REUTERS
Rtr 22:22 01-20-00 |
