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The Big Board on The Board

A for-profit New York Stock Exchange: Can it work?

September 22, 1999



Oddly, that greatest symbol of capitalism, the New York Stock Exchange, is a nonprofit entity. The 207-year-old institution is set up something like a club. It's an expensive one to join.

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Memberships - the 1,366 seats on the exchange - are now priced about $2.6 million apiece. The securities industry firms and individuals owning these seats get to use the facilities - chiefly trading stocks in the auction market on the floor of the exchange. They also have a say on policy.

Currently, the Big Board is drawing up plans to go public - that is, becoming a for-profit company like, say, Allstate or IBM or Raytheon.

The interests of some 70 million Americans who own stocks are at stake as the NYSE sorts out its plans, possibly by 2000. One key question is: Will its management of stock trading, including trading charges, be influenced by a desire to make its own stock price rise?

The potential for a conflict of interest is inherent in a NYSE that lists its own stock on the Big Board.

Whatever the exchange's 26-member board decides - a board that includes sometimes conflicting financial interests - what's certain is that strict regulation of the securities industry must not be diminished.

Regulatory powers, set up by law in 1933-34, are divided between the US Securities and Exchange Commission and the private stock exchanges. Listing, for example, requires a company to meet strict accounting standards. The system has worked relatively well in keeping down the fraud and greed that can easily hurt the securities industry. Watchdogs must be vigilant against inside trading, price manipulation, and other abuses.

SEC Chairman Arthur Levitt warned the two major exchanges that any restructuring of the markets "must ensure that the self-regulatory role will continue to be zealous, adequately funded, and imbued with the public interest." But the exchange feels it must make the change. It's worried about a growing number of competitors.

Not only does the NYSE do battle for corporate listings with NASDAQ - its fully computerized rival that is also talking of going public. But both face challenges from a growing number of electronic communications networks (ECNs). These function much like an exchange, collecting, displaying, and automatically executing customer orders. But they do it over the Internet.

One ECN alone does trades equal to 6 percent of total NASDAQ total volume now. So far, however, they have won a smaller chunk of trades in the shares of the 3,000 companies listed on the Big Board.

Richard Grasso, chairman of the NYSE, argues that privatization is necessary for the exchange to raise capital from public money markets and "pursue the strategies necessary to succeed in the increasingly competitive world." It could use money and stock, for instance, to buy an ECN.

The kind of competition that the NYSE encourages in stock trading has finally caught up with it. But the public interest in fair stock trading hasn't changed. If the keeper of the Big Board is on the board, it may need new safeguards.

(c) Copyright 1999. The Christian Science Publishing Society