"There Goes the Neighborhood"

Sydney M. Williams

Thought of the Day

“There Goes the Neighborhood”

February 11, 2011

While it’s unlikely that the Germans will be singing “Deutschland, Deutschland Über Alles,” as they descend on Wall and Broad to consummate the merger of the Deutsche Börse and the New York Stock Exchange, it will mark the demise of the foremost symbol of American capitalism – assuming regulatory bodies on either side of the pond do not nix the deal. The end of the Exchange, as many of us knew it, occurred in March 2006 when, in a reverse merger, seat holders of the NYSE completed a deal with Archipelago Holdings, then a public company, and the stock began to trade under the name NYSE Group, symbol NYX.

Change at the NYSE has been evolving for years. Jason Zweig, in an article in yesterday’s Wall Street Journal, which was both amusing and informative, traced some of those changes back to the latter half of the 19th Century. More recently, lower commission rates, trading in pennies as opposed to eighths, and algorithmic programs caused volume to accelerate geometrically, demanding far faster computers. Speed of execution became paramount to traders. The effect was to transform the Exchange from a relationship-centric auction market to an execution service center.

When I started in this business, in September 1967, average daily trading volume was about ten million shares a day. By 2006, it was closer to 1.6 billion shares a day. Today NYSE volume has been averaging closer to one billion shares a day, while composite volume in NYSE listed shares totals five times that number. The Exchange has been losing market share. The need for faster execution had been the genesis of Archipelago. With its computers able to match and transact orders in seconds, NASDAQ has taken business from the NYSE. Today, its volume exceeds that of the Exchange. The NYSE either had to change or die. They chose to change.

The front page article in yesterday’s Wall Street Journal, suggests that global stock listing and U.S. stock trading would be based in New York, global derivative trading would be led from Frankfurt, while Paris would host the technology arm and European stock trading. The company would be incorporated in the Netherlands, with its headquarters split between Frankfurt and New York. The NYSE Euronext chief, Duncan Niederauer, would become CEO of the new entity. However, the authors write: “To avoid nationalistic concerns over the name, one idea is to avoid using the word Deutsche or the acronym NYSE, said one person familiar with the plans, who stressed that no decision has been made.” That, in my opinion, would be an unfortunate outcome.

The future is always unknowable and comprises changes most of us cannot envision. However, there are iconic institutions that transcend our individual lives. The New York Stock Exchange has been around since 1792, when George Washington was President. Its history is notable and marks the unfolding of American history. The building was declared a National Historic Landmark in 1978. It survived a fire in 1835; on September 16, 1920, in a horse drawn cart, a bomb exploded outside the Exchange killing 33 people and the horse. In 1967, Abbie Hoffman, one of the “Chicago Eight”, led a group of “yippies” to the visitor’s gallery where they threw dollar bills and paper onto the floor; it was the scene that many of us remember when the Averages dropped 22% on October 19, 1987. And, most famously of all, we recall that it reopened after being closed for only four days following the Islamic Jihadist attack on September 11, 2001. As my friend Vince Farrell wrote in his yesterday’s commentary, Wall Street Knows the Price of Everything, “There are some things that should not be measured by numbers on a spread sheet.”

For decades, money has flowed around the world, alternately chasing yields and safety. Algorithms are programmed to search for price discrepancies and then set to pounce when they appear. Since competition is intense, it is often he who is fastest wins. Technology is expensive and size provides advantages, the consequence being the mergers we have seen and will continue to see. As well, valuations are lower. The price of NYX is a third lower than it was when five years ago it first began to trade.

However, the deal needs the approval of at least three U.S. regulatory bodies: the Justice Department, the Securities and Exchange Commission and the Committee on Foreign Investment. As the combined business will control something like 85% of all European derivative trading, there is some speculation that some of those operations may have to be spun off. Regardless, for most U.S. investors there should be no visible change in the way orders are entered, executed and reported.

Nevertheless, the sale is a sad commentary. The U.S., for the nonce, remains the world’s leading economic and financial power. Unfortunately, regulations such as Sarbanes-Oxley have either prevented smaller companies from going public or chased IPOs offshore. The Wall Street Journal, in today’s lead editorial, points out that last year there were 171 initial public offerings in the U.S., but there were 1,295 companies that IPO’d overseas. Our rules and regulations risk placing the country at a competitive disadvantage at a time when global competition is becoming increasingly intense.

To lose an icon is always sad. To lose the icon that symbolizes the strengths, hopes and opportunities for millions of actual and aspiring investors and entrepreneurs is especially sad. Capitalism built this country; it created standards of living that were the envy of the world, driving immigrants to our shores; it paid for all the institutions we value so dearly – museums, universities and stadiums. It is not so much the loss of the Exchange that is difficult to bear; it is what the loss symbolizes and the cultural change it indicates.