Competition Forces Changes at the Big Board : NYSE’s Phelan Seeks Consensus Among Constituencies

Relentless competition in the securities business is forcing the 192-year-old New York Stock Exchange to change in ways that would have been unthinkable 15 years ago.

Big Board Chairman John J. Phelan Jr. acknowledged that the world’s largest securities market no longer has the power to dictate inflexible rules to listed companies but must respond to changes in the business and regulatory climate.

As an example, a subcommittee of the exchange is considering a rule change that would allow listed companies to offer two classes of common stock with unequal voting rights--often as a measure to discourage hostile takeovers.

Today, such offerings are grounds for delisting a company, although exceptions are being made to keep firms from jumping to the American Stock Exchange or the over-the-counter market, which allow trading in such shares.

“We’ve become a victim of our own policies,” Phelan, 54, said in an interview this week. “When we had the unquestioned power to say ‘thou shall’ or ‘thou shalt not’ companies came to us because they needed our credibility. But today, no one institution has the ability or authority to impose those standards--and shouldn’t. What is needed is consensus among all of our constituencies.”

Building that consensus has become Phelan’s overriding challenge since assuming chairmanship of the New York exchange last May.

During the previous decade, Phelan served as an exchange vice chairman and then as president, charged with upgrading the electronic machinery needed to keep pace with skyrocketing trading volumes and to assure the integrity of the market.

It was a turbulent time. The explosive growth of the National Assn. of Securities Dealers’ over-the-counter market challenged the Big Board’s preeminence. Many of the glamour companies in high technology chose to list with NASD rather than accept the strict and costly rules of the New York exchange.

In May, 1975, the SEC abolished fixed commissions on trades, sending shock waves through the brokerage community. The exchange’s annual report that year described 1975 as a year when “gloom and doom” pervaded the securities business.

Meantime, trading volume on the Big Board boomed, growing from a daily average of less than 30 million shares a day in 1977 to 110 million last month. The exchange’s antiquated paper-based systems had to be brought into the electronic age and the huge volumes made surveillance of trades an increasingly critical task.

The exchange is now equipped to handle a sustained volume of 250 million shares a day, and more than $100 million has been invested in surveillance systems, Phelan said.

While they are sophisticated, he added, and can alert exchange officials to suspicious activity on the floor, they cannot prevent insider trading and other abuses.

Stiff competition for the trading dollar has forced the exchange to move into new products. Phelan introduced the New York Futures Exchange four years ago and, while its volume has been disappointing, Phelan isn’t giving up on it. Instead, he is negotiating a joint venture with Commodity Exchange Inc.

In late 1983, the Big Board introduced trading in options on the NYSE composite index and added two other indexes last year. Last week, the exchange won SEC approval to begin trading in individual stock options.

“Our strategy is to broaden the product line,” Phelan said.

Part of the strategy is to extend the NYSE’s geographical reach. Phelan is moving aggressively toward some form of joint operation with the London Stock Exchange and is negotiating a merger with the San Francisco-based Pacific Stock Exchange. Tokyo is next, he said.

The proposed combinations will accelerate the move toward 24-hour trading, already under way in a small number of internationally traded stocks. Within five to 10 years, Phelan predicts, “150 to 300 companies will be traded on a continuous basis around the world.”

Although Phelan sits atop the pinnacle of free enterprise, in many ways he doesn’t fit the mold of the gray-flannel capitalist. He has a wry, sometimes sarcastic, sense of humor and doesn’t take his exalted post overly seriously.

In a sweeping five-minute review of American economic history before a group of government and business leaders last week, he referred to the Great Crash of 1929 as a “technical correction” and jokingly revealed his secret of building trading volume and boosting stock prices. “A couple of years ago I had a ‘buy machine’ installed in the basement of the exchange. We got it cranked up last August (when daily volume hit a record 236 million shares) and it worked beautifully for three days. Then it broke down and we’re still trying to fix it.”