Risks in a For-Profit Big Board
The New York Stock Exchange, that august, 207-year-old institution synonymous with capitalism and wealth, is going hip. It wants to transform itself from a member-owned club to a for-profit company and sell shares to the public the same way other companies trade theirs on the Big Board. The reason is simple. Online traders have been eating into its business, and the NYSE needs both the cash and the flexibility to keep pace with the electronic upstarts. In fact, the NYSE’s transformation to a publicly traded company might well be its ticket to survival in a world in which the organized chaos of the exchange’s trading floor is being replaced by computers.
The conversion of the NYSE to a for-profit company--along with that of its rival, NASDAQ--raises a host of public policy questions, some of which NYSE Chairman Richard Grasso dealt with last Thursday when he announced the decision to go public next year. Securities regulators in Washington have some justifiable concerns, and so should the 70 million Americans who own shares traded on the Big Board.
The NYSE lists more than 3,000 companies, whose combined share value exceeds $16 trillion, and acts not only as an auction house but as the regulator of its members and brokers. Through a separate regulatory unit, the Big Board has established rules on trading, record-keeping, capital adequacy and other requirements and punishes those who violate them. But once it goes public, and its members become shareholders, how diligent will the NYSE be in investigating possible misconduct or reporting violations to federal regulators?
One securities specialist put it simply: Going public puts the NYSE into “one massive conflict of interest.”
The Securities and Exchange Commission singled out potential conflicts as a key issue in Big Board privatization and rightly insists that the regulatory arm of the NYSE be spun off as an independent unit. The SEC should also demand safeguards to prevent individual NYSE shareholders from exerting undue influence on operations.
New electronic trading systems clearly undermine the role of stock exchanges as middlemen, putting pressure on the NYSE and other exchanges to restructure, improve efficiency and reduce costs to investors. Offering shares to the public is a part of the process, but regulators must make sure that the public interest is safeguarded as well.
