The Pacific Exchange’s Floor Show Is Closing

When the closing bell rings on the Pacific Exchange’s Los Angeles stock trading floor today, it literally will be the closing bell.

The 102-year-old trading operation--which began life as the Los Angeles Oil Exchange in an era when oil lubricated the local economy--is falling victim to changing times and what some critics say were missteps by its owners. The once-bustling trading floor on Beaudry Avenue west of downtown will shut for good at 1 p.m. local time, when the markets close for the day.

“The sentimental side of me is very sorry to see the floor go away,” said Dale Carlson, a spokesman who has been at the exchange for 14 years. “But there’s very little value in sentiment in this industry in this age. Most, if not all, stock-trading floors are going to disappear.”

The exchange’s stock-trading operation is slated to survive in an electronic format run by a Chicago firm, and the exchange’s profitable and fast-growing options division will remain intact. But bricks-and-mortar stock exchanges--where humans meet to buy and sell stocks--are becoming increasingly irrelevant in a world of online everything.

“Few people realize it isn’t already gone,” said consultant Wayne Wagner of the L.A. trading floor.

In some ways, the demise of the Pacific Exchange’s two stock trading floors--its San Francisco stock floor will be shuttered later this year--reflects the problems haunting all exchanges in the electronic era. There are seven U.S. stock exchanges today, down from more than two dozen in the early 20th century.

Years ago, their trading floors were a central meeting place for local investors. But today, even the New York Stock Exchange is fighting to fend off low-cost rivals that swap shares in cyberspace.

Exchanges also have been hampered by balky ownership structures. Most are controlled by the hundreds of firms that trade on them, thus making them bureaucratic and slow-acting.

And regional exchanges have always been at a competitive disadvantage given their small size compared with the NYSE, experts say. The Pacific, for example, handles an average of 8.5 million shares a day, compared with 1.2 billion on the NYSE.

Nevertheless, some critics say the Pacific’s owners made mistakes that exacerbated its problems.

The biggest, they say, was maintaining dual trading floors. Because Los Angeles firms refused to move to San Francisco and vice versa, the exchange was saddled with hefty costs.

The Pacific’s basic problem was a lack of ambition, said David Geffner, a trader on the L.A. floor for 30 years until his retirement in 1997. Pacific trading firms never wanted to spend the money or make the short-term sacrifices to compete aggressively for trading business, a mentality that left the exchange ill-prepared when competition suddenly stepped up in the 1990s, he said.

“Nobody’s going to miss it and nobody’s going to care [that the floors are gone] because the exchange never took the opportunity to put itself on the map,” Geffner said.

Pacific spokesman Carlson acknowledged that the dual floors were a hindrance. But the Pacific tried hard to improve its trading system and to lure investor business, he said.

In 1969, for example, the Pacific became the first exchange in the world to use computers when rivals still relied on ticker tape, Carlson said.

“There just isn’t an exchange in the country that’s been as innovative as this place,” Carlson said.

Some experts agree, saying the Pacific and other regional exchanges introduced many improvements that were copied by the NYSE.

The Pacific attempted several high-profile gambits in recent years to rescue its sliding stock business. Although the ideas seemed smart at the time, they simply didn’t pan out, experts say.

In 1998, it announced plans to merge with the Chicago Board Options Exchange, but was jilted when the CBOE abruptly backed out in January 1999.

That same month, the Pacific launched a highly touted trading system developed by OptiMark to augment its stock trading operations. But OptiMark never met expectations and suspended its operations on the Pacific last year.

“A lot of smart people put a lot of money into [OptiMark],” said Bernard Madoff, head of a New York-based trading firm that competes against the Pacific. “At the time, the [Pacific] looked like it was making the right decision.”

For traders who spent much of their careers on the L.A. floor, its closing marks the end of an era.

The floor was a hub of activity in the 1970s and ‘80s, they say, trading NYSE-listed stocks and a handful of shares listed only on the Pacific Exchange. But it lost vitality in the late 1990s as major firms such as Merrill Lynch & Co. pulled out and as traders fled to other jobs.

“One of the hardest decisions I ever made was leaving that floor,” said Jeff Cullen, 26, who exited a year ago. “It was very difficult to decide to leave. [But] it was even more difficult to watch everyone leave and still sit there.”

Cullen and several former Pacific veterans now trade on their own at a local day-trading firm.

In its earliest days, the exchange let Southern California investors trade shares of oil and other industrial companies. It prospered until, like other exchanges, it was hit hard by the 1929 stock-market crash.

In 1957, the exchange merged with its bitter rival, the San Francisco Stock and Bond Exchange, to form what would eventually become the Pacific Exchange.

The exchange ventured into options in 1976, and by the mid-1990s saw that business eclipse the stock operation.

Pending approval from the Securities and Exchange Commission, Archipelago Holdings will run the Pacific’s stock business as the newly christened Archipelago Exchange. The Pacific would provide regulatory oversight.

Archipelago runs a successful business in Nasdaq stocks, but has been largely blocked from venturing into stocks traded on the NYSE and regional exchanges.

Archipelago paid the Pacific $40 million and gave it a 10.8% equity stake.