Pacific Stock Exchange in Market for an Identity : Relative Obscurity Puts It at Disadvantage in Competing for Securities Business
The Pacific Stock Exchange recently received an invitation from Mayor Tom Bradley’s office to a city-sponsored event. The invitation seemed correct and proper, addressed to Thomas P. Phelan as the exchange’s president.
Except for one problem: Phelan resigned as president of the exchange 13 years ago.
The incident could easily be passed off as an example of outdated record-keeping at City Hall. But to the current president of the exchange, Maurice Mann, the case was all too typical of a bigger problem that he must overcome to ensure the exchange’s long-term prosperity: its relative obscurity and lack of identity in Los Angeles as well as throughout the securities industry.
“We’re going to have to find an identity,” said Mann, 58, a former thrift industry regulator and investment banker who took the Pacific’s top job last February with the goal of whipping it into new life and clearly establishing it as the nation’s “premier” regional stock exchange.
With securities trading becoming increasingly international, 24-hour trading moving closer to reality, and London, New York, Chicago and Tokyo remaining the dominant trading centers, the PSE must develop new technologies, new trading products and new trading links overseas or risk becoming obsolete or unnecessary, Mann said in an interview. The exchange, he said, has little unique to distinguish it from other exchanges.
Mann has already begun to make his mark. He is phasing out the exchange’s money-losing stock clearing and depository operation, which will eliminate about half of the exchange’s 700 jobs. He dropped an index option that failed to ignite trading interest. He added directors of marketing, planning, public relations and governmental affairs to boost the exchange’s image and clout, and to develop new products. He is exploring trading links and joint ventures with other exchanges, particularly those in East Asia, where he feels the PSE has an advantage over many of its rivals.
All this comes amid encouraging signs. Equity and options trading on the PSE has been increasing, thanks to the bull market. The PSE recently passed the Philadelphia Stock Exchange in options trading volume, moving into third place nationwide behind the Chicago Board Options Exchange and the American Stock Exchange. Equity volume continues to set records, although it is still less than 4% of the volume of the giant New York Stock Exchange.
Reflecting the higher volume, a seat (membership) on the PSE last week sold for $84,500, close to the record $90,000 price set in 1983 and certainly well above the 25-cent price for a PSE seat some eight to 10 years ago when the exchange was on the verge of bankruptcy. (Seats on the New York Stock Exchange and American Stock Exchange recently sold for $1.1 million and $400,000, respectively.)
But whether Mann and the PSE can ultimately succeed is still an open question. The challenge of merely surviving is becoming greater these days.
The exchange, with equity trading floors in Los Angeles and San Francisco and an options trading floor in San Francisco, has no futures trading at all and has yet to become a major player in the growing field of index options. A possible regulatory change that would increase competition between exchanges in options trading could, if enacted, put its options trading floor out of business, PSE officials worry.
(Futures are contracts that allow an investor to buy or sell a specific amount of a commodity or financial instrument at a particular price at a stipulated future date. Options are rights to buy or sell a security at a certain price during a specified period of time. Index options involve an investor’s speculation on the movements of certain indexes of stocks or other financial instruments.)
The exchange also must prepare for the inevitable bear market, which could shrink its trading volume--and revenue--severely.
May Not Need Floor
Meanwhile, the exchange faces increasing competition in its bread and butter business of stock trading. The battle for listings and trading volume has intensified among regional exchanges, the NYSE, the Amex and the National Assn. of Securities Dealers Automated Quotations (NASDAQ) system of over-the-counter trading.
Some even question whether the world of the 21st Century will need trading floors and exchanges. Many brokers believe that stock trading will increasingly move toward systems similar to NASDAQ’s, where trading between parties takes place by computer, bypassing trading floors. The London Stock Exchange has already moved in that direction.
“I’ve been a floor broker for 30 years and I’m not sure we need a floor,” said Richard J. Casey, president of Casey Securities, a PSE member. The NASDAQ system, or something similar to it, “is eventually what stock trading is going to look like,” he said.
Exchanges such as the PSE may find opportunity in operating such systems, suggested Gordon S. Macklin, chairman of the San Francisco-based brokerage of Hambrecht & Quist and a former competitor of the PSE when he was president of the National Assn. of Securities Dealers.
“The PSE does have many strong features,” Macklin said, noting that the exchange has been a leader in developing technology to handle orders more efficiently.
Playing with new opportunities while overcoming myriad hurdles seems just the right kind of challenge for Mann, who industry officials and colleagues describe as a hard-driving workaholic who thrives on solving problems and developing new ideas. A Ph.D in economics from Syracuse University, he has built extensive financial services connections and credentials serving both in government and in the high-stakes world of investment banking.
Keeps Rivals Honest
Until joining the PSE, he served as an investment banker at Merrill Lynch Capital Markets and a company it acquired, Becker Paribas, where he specialized in deals involving savings and loan firms and other financial services companies. Before that, he regulated S&Ls; as president and chief executive of the Federal Home Loan Bank of San Francisco.
Mann said he took the PSE job largely because he believes in the role of regional stock exchanges in keeping bigger exchanges honest. About 60% of the stocks listed on the NYSE, for example, are also listed on the PSE. Brokers and traders, if unhappy with prices or the speed of execution at the NYSE, can direct their trades to the PSE or elsewhere.
Regional exchanges have also been sources of technological advancement. The PSE, for example, was a leader in the computerization of small-block trading. And that has made the PSE a leader in small trades, so much so that the PSE ranks second only behind the NYSE in total number of trades. About 10% of all equity trades reported on the NYSE consolidated tape are executed on the PSE.
But the PSE still is far behind the NYSE in total volume of shares traded, averaging only about 7.5 million daily, compared to an average of more than 150 million shares for the Big Board. The PSE ranks a distant fourth in total trading volume among exchanges, behind the NYSE, Midwest Stock Exchange and Amex. It is also trailing in listings, with about 1,300, compared to nearly 1,600 for the NYSE and about 4,400 for NASDAQ--both as of the end of last year.
Stronger Local Identity
Mann wants to get more listings and more volume, particularly from the large-block trading that is dominated by the NYSE and Midwest Exchange.
To help do so, he hired Donna J. Knight, 42, a former national director of an equipment-leasing limited partnership in San Francisco, as senior vice president in charge of marketing and product development. Her missions include persuading fast-growing corporations to list their stock on the PSE and persuading brokerages to divert more trades to the PSE.
Knight also wants to boost the PSE’s identity in Los Angeles and San Francisco through greater participation in civic and business affairs. She is seeking to find out which of the top 100 publicly traded companies based in Los Angeles and San Francisco list their stock on the PSE. The lack of such knowledge perhaps illustrates the exchange’s weak marketing in the past, she agreed.
To solidify its identity and establish a niche, the exchange could specialize in trading certain types stocks or options, such as high-tech stocks or stocks of bankrupt companies, Mann suggested.
The exchange needs new products, he said, but he is not sure what they will be. “We’re really not that far along,” he said. However, he added that he is exploring possibilities ranging from trading in futures to currencies to asset-backed securities.
The exchange also needs a winning entry in the game of index futures and options, a field that has exploded with the growth of program trading by institutions seeking to profit from short-term price discrepancies between indexes and their underlying securities.
Mann also is keen on exploring ventures with other exchanges, moves that he and others see as key to ensuring the PSE’s role in the increasingly international securities markets and in the eventuality of round-the-clock trading. Mann led a PSE delegation last March that visited officials in Shanghai, Hong Kong and Beijing; another plans to visit Seoul, Osaka and Tokyo next month.
Mann has not precluded links with other U.S. stock or commodity exchanges but added that he is not interested in a merger with the NYSE, an idea that was proposed but dropped two years ago.
The PSE also might extend its close of trading from 1:30 p.m. Pacific time now (a half hour after the NYSE close) to as late as 4 p.m., when markets in the Far East begin to open. Evening trading, aimed at capturing more trading from cash-laden Asian investors, was initiated in this country last May by the Chicago Board of Trade with extended hours for U.S. government securities contracts.
Eventually, Mann said, “There will be 24-hour trading of some sort.”
