Tops $1 Million : Cost of NYSE Membership Is Going Up
For more than 20 years, Samuel Weiss has been trading stocks on Wall Street and keeping watch--through rallies and slumps, booms and crashes--on the market in perhaps the single most important commodity sold in the financial district: a seat on the New York Stock Exchange.
Since the end of last year, he has seen that market move almost faster than the eye can follow.
“This is unique,” Weiss, 69, said one day recently at his New York office. “There has never been a jump in prices like we’re seeing now.”
Records Topple
On April 23, a seat on the exchange sold for the first time for $1 million. That broke the previous record, an $850,000 mark that had lasted just three days. The $1-million seat topped the 1986 year-end record price of $600,000 by 40%, and itself was topped one day later, when a seat changed hands for $1.1 million. Stock exchange aficionados say the day of the $1.5-million seat may not be more than a few weeks away.
The rapid appreciation of prices, which has far outstripped the rise in the stock market itself over the same period, has focused new attention on this one linchpin of the entire trading system of the stock market. For without owning a seat, no one may trade a share of stock on the exchange. Instead, one must deal through someone who does own a seat, a process that adds considerably to overhead for any active, professional dealer in securities.
Indispensable Requirement
As the indispensable requirement for doing business on the exchange, the seat has been the symbolic repository of tradition on Wall Street for more than a century, though it has been a long time since any trader on the floor has had the time or the opportunity to actually sit in one. (The term “seat,” which now simply denotes exchange membership, derives from the time when exchange members would sit in assigned chairs, waiting for individual stocks to be called for trading.)
The number of available seats has been largely fixed since the 1920s, although one change was made in 1953, when the number was reduced to the current figure of 1,366 from 1,375.
The date and price of one’s seat purchase is something that almost every owner remembers, not least because it is a fairly reliable barometer of stock market trading volume, rising when volume rises and falling when volume dwindles. The seat is also an emblem of membership in the exclusive club of floor members of the stock exchange and thus something with tremendous emotional significance.
“My father bought his seat in 1932,” recalled Robert Fagenson, a specialist trader, or one charged with supervising the trading in a select group of stocks, “and he paid about the same dollar amount as I paid for mine in 1973--about $85,000. He saw his go up to about a half-million, and while we both owned seats we saw them fall to less than $40,000.”
On the other hand, seat prices are by no means a dependable indicator of stock market direction: The price record that stood the longest was the $500,000 price paid for a seat just before October, 1929--the Great Crash.
The rights conferred by seat ownership have been the subjects of some of the bitterest battles fought on the floor. Many traders recall the divisive fights in the late 1970s over whether to allow members to lease their seats to others. The measure finally passed, and about a third of all seats are currently under lease.
A Fixed Scarcity
Moreover, the very process by which seats change hands has been carefully fashioned to parallel that of the exchange’s principal business. Among its obvious features is the element of supply and demand, governed by the fact that by limiting the number of seats to 1,366 the exchange maintains the supply at a fixed scarcity.
“It’s just like trading stocks,” Ira Haupt II, a member of a family that has worked the NYSE floor for four generations, said with a chuckle. (Haupt paid $93,000 for his seat in 1958.) Seats are transferred when a buyer and seller meet through a broker--the exchange itself functions as the broker on all seat sales--and settle on a mutually agreeable price. Before the transfer can actually take place, the exchange subjects the buyer or lessor to a series of background checks covering his or her financial backing and past securities law violations and requires the buyer to pass a test on trading practices and exchange floor rules.
Nominal Considerations
An average of about 100 seats change hands every year, with 25 or so sold in cash transactions between strangers, and the rest trading for nominal considerations within large firms, as one employee of a firm relinquishes his floor job to another.
The price of a seat is inextricably tied to the economics of the exchange floor--even more than to the direction of stock prices themselves. The seat’s value is measured in terms of the amount of commissions one can generate as a floor broker. In recent years, that has been rising steadily as average exchange volume rises to levels that some old-timers on the floor would once have considered the subject of fantasy.
“Nobody should be really surprised at seat prices today because trading volume is up over 200 million shares a day,” remarked Weiss, who runs something of a cottage industry in buying and leasing seats. As recently as 1968 and 1969, when seat prices hit their previous records, the average NYSE volume was closer to 12 million shares a day, the all-time record was 21.3 million shares, and seats sold for $515,000. The current volume record, set Jan. 23, is 302.5 million shares.
‘It’s an Investment’
“The prices of seats are governed by very rational economic decisions,” said William Freund, a former NYSE economist now teaching at New York’s Pace University. “It’s an investment, and the buyer is looking at its potential profitability for the future. We know what’s happened to volume, and there’s a great deal of expectation that we’ll see more volume in the future.”
But as in anything else on Wall Street, peaks are defined by the valleys between them. The seats sank to their modern-day lows in 1977, when they traded for just under $40,000, the lowest price since 1915. Volume had stagnated, and the floor brokers of the exchange faced a greater threat to their livelihood: Under Securities and Exchange Commission directive, the exchange on May Day, 1975, had deregulated brokerage commissions, which promptly plunged.
“The seats were $30,000 to $40,000, and no one wanted them,” Weiss recalled. “In those days, they were talking about the exchange going out of business.”
Purchase by Japanese
Since then, seat values have been pushed back up by some of the same factors buoying the stock market. One is the inflow of immense amounts of foreign capital, particularly Japanese. Last month’s $850,000 seat was purchased by Nomura Securities, a giant Japanese brokerage undertaking a major expansion in the United States.
Nomura already owned at least one other seat, as do several other Japanese brokerages and some British and German banks. These foreign institutions, eager to gain a foothold in the U.S. markets and sufficiently well-heeled to pay for the privilege, are bidding up the prices.
(It should be noted that the Japanese so far do not recognize a reciprocal privilege: American firms have yet to win the right to purchase a seat on the Tokyo Stock Exchange, where seats are currently selling for the equivalent of $7 million. Merrill Lynch & Co. and Salomon Bros. Inc., among other securities firms, are seeking the right, and Salomon executives say they hope to become members of the TSE by the end of this year or mid-1988.)
‘A Passive Interest’
Exchange members do not follow seat prices with quite the same attention one would expect from the holder of such an important and appreciating asset--and certainly not with the single-mindedness that some homeowners, say, follow fluctuations in home prices in their neighborhoods. “There’s a passive, curious interest that we all have,” Fagenson said.
The interest is no more active than that because it is not easy to cash in on one’s seat by selling it. “I know I need to have it to do what I do,” said James A. Jacobson, a partner in Benjamin Jacobson & Sons, a prominent firm of exchange-floor specialists. “I’m never going to sell it.”
There are some people on the exchange floor who fear that the run-up in seat prices will take its toll on the dynamics of trading, particularly by harming the large cadre of independent floor brokers, known as “$2 brokers” because of their traditional fee for executing orders for other traders.
Slimmest Profit Margins
These brokers work under some of the slimmest profit margins on the floor and many lease, rather than purchase, their seats. Lease prices--generally keyed to 12% to 18% of seat prices--have been rising from the $60,000 of early 1986 to $100,000 earlier this year. A few weeks ago, one lease was issued for $130,000, a price at which many traders doubt the average $2 broker can survive.
“I know one gentleman retiring next week at the age of 70,” Haupt said. “He’s leaving because his lease came up and he couldn’t afford the $130,000 he would have to pay.”
If high prices dry up the lease market, some brokers say, that may push seat prices back down. If not, the only thing that may turn around the hot market in exchange seats is the great leveler of all stock trading: a bear market that cuts volume significantly.
“I’m not concerned about the market as long as a slow day still has volume of 180 million shares,” Weiss said. “When volume starts to drop, I’ll be worried.”
