Resumption of Trading Will Test NYSE

When business finally resumes on the trading floor of the New York Stock Exchange--the most famous 36,000 square feet of space in the financial world--the brokers and traders who work there will know that more than a century of history and their very way of life will be on the line.

“Being inside the exchange building will be difficult,” said James A. Jacobson, a leading trader and former NYSE board member. “People are going to relive harrowing experiences. But it’s something we all have to do.”

In the generations since the NYSE’s unique trading system emerged, it has faced down countless challenges--political, financial and technological. In the 1980s and ‘90s, for example, electronic and computerized trading threatened to supplant the NYSE’s face-to-face auction process. By the millennium, however, the Big Board had widened its lead as the world’s dominant stock market.

But last week’s attack may revive some of the old questions, not only because it heightened concerns about the vulnerability of any large gathering of people, but because the chaos has provoked the longest shutdown of NYSE trading since before World War II.

The key question is this: In an era when information can circle the globe at the speed of light, why should $20 billion a day in investment transactions be forced to come to this location to be handled in person by a cadre of 3,000 professionals?

“Do we have the appropriate trading infrastructure in 2001, given the threat of terrorism?” asked Junius Peake, a finance professor at the University of Northern Colorado and an expert on electronic trading systems. “My answer is no. No other country in the world has emulated the New York Stock Exchange’s physical facility.”

When trading resumes, the paramount challenge will be logistical--the sheer complexity of moving about 125,000 workers into the financial district of lower Manhattan, where the communications, transport, service and utility infrastructure has been severely damaged. Work space is another problem. About 20 million square feet of office space was destroyed in and around the World Trade Center towers, which housed 40,000 workers.

Financial and service firms already have made arrangements to move the functions performed in those buildings to New Jersey, Long Island and elsewhere. If the relocation becomes permanent--as it well might, given the obstacles to rebuilding on the Trade Center site--that could lead to a decline of Manhattan’s status as the premier financial center.

This would not be the first time Manhattan faced an outflow of financial jobs. Securities-industry employment in New York dropped by about 20% from 1987 to 1992. Although some of that decline reflected market uncertainty after the 1987 stock market crash, much was the result of the wholesale relocation of clerical and systems jobs to the suburbs.

The decline was reversed during the bull market that followed.

Human Factor Plays Big Role at Exchange

In recent years, a different migration has occurred as brokerages moved their main offices from the cramped and costly financial district north to midtown Manhattan. So even if the disaster leads to a renewed exodus of back-office staff, New York would not lose its luster as the center of the financial world.

But a significant challenge faces the stock exchange itself.

Although the exchange likes to date its birth to 1792, it was about 110 years ago that an exchange broker got the idea of specializing in a specific security and thus created the Big Board’s characteristic system. Today, the elite among the floor traders and brokers at the NYSE are the 482 “specialists,” each responsible for ensuring smooth trading of the 2,800 listed stocks.

Part auctioneer, part dealer, part mediator, the specialists most distinguish the NYSE from the world’s other stock markets. By NYSE rules their job is to match buyers and sellers, and to stand ready to buy or sell shares themselves as needed to maintain order in the market and keep share prices from unnecessary fluctuations.

In normal circumstances, as the din of traders’ shouts echoes off the exchange’s high marble walls, the specialists’ jaws work incessantly on wads of chewing gum to ease the tension of making thousands of split-second decisions in a 6 1/2-hour trading day. They grow splayfooted from years of standing on the hardwood floor or leaning backward with their elbows on the waist-high counters of their trading posts, often facing down a braying mob of brokers demanding their orders get filled.

The day the market reopens will be anything but normal. Many of the roughly 3,000 individuals who work on the exchange floor and the nearly 125,000 who are part of its larger professional family were direct witnesses of Tuesday’s disaster. Most were close enough to ground zero to feel or hear the initial crash about 42 minutes before the 9:30 a.m. opening bell. They turned their attention to the sight through their office windows and then, transfixed, watched as the second plane crashed.

“It’s a physical and psychological disaster,” said Robert Fagenson, a specialist and NYSE board member. “On the floor, a lot of people will have lost a lot of people they knew. But our business is very much one of necessity being the mother of invention. This nation and the world expect the markets to be open and liquid. We’re getting the job done because we have no choice.”

How the psychological burden will affect people in the controlled chaos of a trading day is anybody’s guess.

“The mood is going to be conflicted,” James Jacobson said. “We’re very close physically to where the World Trade Center was. We’re close to the rescue workers. The smell will probably still be in the air.

“In a different sense it’ll probably be like Tuesday, Oct. 20, 1987,” he added, referring to the day after the 1987 crash. “Though that was a financial--not a human--catastrophe, we didn’t know what we were facing then, either.”

Many traders believe--and hope--that at first the pace of trading will be relatively modest. “Some firms will have trouble being at full force. They’ll be at backup sites, they’ll have trouble getting people to the office,” said Barry Berman, managing director of trading at the Milwaukee-based brokerage Robert W. Baird & Co. “I don’t anticipate heavy volume or a big desire to trade.”

“If you can find a silver lining in all this,” said Robert S. Jacobson Jr., James Jacobson’s brother and business partner, “maybe it will make everything go kinder and gentler. I think there’s going to be an enormous amount of cooperation.”

Others, however, see a wave of pent-up sell orders bringing the entire market down by 5% to 10% before it stabilizes.

NYSE officials and traders say they are confident that the Big Board’s way of doing business will easily prevail over this latest crisis. The exchange, they note, has survived many dire predictions of its fate over the years.

Not long ago the Nasdaq Stock Market, an all-electronic system in which trades can be executed by brokers located almost anywhere in the world, billed itself as “the stock market of the 21st century.” That bravado evaporated in the wake of Nasdaq dealers’ $1-billion settlement in the late-1990s of federal charges that they were systematically cheating investors out of the best stock prices.

Many experts believe that an automated trading system accessible to investors who don’t need to bring their trades to a central floor can be inherently fairer and more efficient than the NYSE system. Electronic trading is “very effective at allowing equal access to many different types of trades,” said Lawrence E. Harris, a professor of finance at USC’s Marshall School of Business.

On the other hand, the face-to-face auction allows investors, particularly big ones, to more-closely tailor their trading patterns to their individual needs and the condition of the market. NYSE specialists also win high marks for their determination to handle any trade in their designated stocks, even during moments of crisis.

“I’m not convinced that the prevalence of the NYSE and its continued leadership can be attributed just to open outcry [setting prices by calling out bids and offers on the floor],” said Samuel L. Hayes, professor emeritus of investment banking at Harvard Business School. “There is something to having a market maker who is the market of last resort.”

“The battle for the best market structure for the customer has been fought and won, and the agency auction market [i.e., the NYSE] has won,” Fagenson said.

Trading System Has Responded to Changes

The specialists believe the success of the NYSE derives chiefly from the way they’ve done business for generations--and a terrorist attack won’t change that.

“Every market in the world would love to do it our way, if they could,” Fagenson said.

That’s not to say the system hasn’t responded to change. In the 1980s exchange Chairman John Phelan masterminded a costly upgrade to allow the floor to trade up to 900 million shares a day. To many traders, the expenditure seemed extravagant because daily volume was running at only 250 million. They changed their minds the day of the 1987 crash, however, when a then-record 604.4 million shares changed hands.

The upgrading has continued, with more than $1 billion spent in the last 10 years on electronic systems. “Today we do 1.1 billion a day, and it’s a layup,” James Jacobson said.

Other changes have been more profound. The rapid expansion of financial trading after the 1987 crash made family ownership of the specialist firms obsolete. In 1986 there were 57 firms, most of them passed down from generation to generation. To many on the floor, the crash of ’29 was a page out of family lore.

Shortly after the ’29 crash, the NYSE changed its rules to allow major brokerages to own specialist firms, and the family businesses, discovering they could not raise the capital to survive, sold out. Today there are 12 firms, most of them owned by major investment powers such as Bear Stearns and Goldman Sachs. The Jacobson brothers’ firm, Benjamin Jacobson & Sons, was founded by their grandfather in 1931 and sold by them to Goldman Sachs this year. Its parent firm is one of the five largest specialist firms on the exchange.

The specialists contend the consolidation trend has strengthened their hand by ensuring they have the liquid capital to support the frenetic trading of the modern era.

“We have the greatest pool of liquidity in the world,” Fagenson said, “and that won’t be changed by the World Trade Center bombing or the rising or the setting of the sun.”