State Treasurers Take Case for Reform to NYSE
A group of state treasurers Tuesday pressed the case for sweeping reform of the New York Stock Exchange’s governance structure, while the nation’s biggest mutual fund company reopened a battle that threatens the very heart of the exchange’s trading system.
Some longtime NYSE observers said the day’s events demonstrated the extent to which the 211-year-old exchange has come under siege by unhappy constituents, after the resignation last month of Chairman Richard Grasso over his massive pay package.
“Nothing is outside the reaches of reform now,” said John Wheeler, head of stock trading at American Century mutual funds in Kansas City, Mo.
The treasurers of California, New York, Pennsylvania, North Carolina and several other states had their first face-to-face meeting with NYSE interim Chairman John S. Reed since he was named to the post Sept. 21. The treasurers, who help oversee more than $1 trillion in state pension assets, had been among the most vocal investors demanding Grasso’s ouster early in September, after the exchange disclosed that he was owed compensation of nearly $188 million.
Meeting at the NYSE’s headquarters in lower Manhattan, the treasurers spent nearly two hours with Reed and told him they largely backed a 33-point list of reforms recommended earlier this month by a special governance committee of the exchange’s board.
The proposals include shrinking the NYSE board from 27 members to 17, requiring that a majority of board members come from outside the brokerage industry and publicly disclosing each year the pay of the top five exchange officers.
Reed, the former chief executive of financial giant Citigroup Inc., came out of retirement last month to take temporary control of the exchange amid the crisis triggered by the Grasso pay affair. A permanent chairman is expected to be named next year.
Reed has said his mission is to restore confidence in the NYSE by addressing long-standing issues of how the exchange governs itself and how it relates to its various constituencies, including the securities industry, listed companies and investors.
The NYSE’s critics say Grasso’s compensation epitomized how the exchange has operated under a shroud of secrecy, favoring the needs of member brokerage firms at the expense of companies and investors.
At a news conference after Tuesday’s meeting, Alan Hevesi, New York state comptroller, said that Reed did not commit to specific reforms but indicated that the governance committee report would be a “baseline” for change. Hevesi said he came out of the meeting “more encouraged than I thought I would be.”
California Treasurer Phil Angelides said he was “heartened” by Reed’s responses to the group’s concerns. He also said the treasurers reiterated that the pay packages granted Grasso and other top NYSE officers should be renegotiated.
“I was given to believe he would make every effort to make [that] right,” Angelides said.
Reed did not comment publicly after the meeting.
Separately on Tuesday, mutual fund titan Fidelity Investments attacked the NYSE’s tradition-bound trading system as inefficient and fraught with conflicts of interest that keep big and small investors alike from getting the best prices for stocks.
Fidelity’s arguments, which appeared in a Wall Street Journal interview with Scott DeSano, the fund firm’s head of stock trading, have been put forth by other NYSE critics for years.
But some analysts said efforts to force significant reform of the NYSE trading system might be gaining momentum with the departure of Grasso, who had been a stalwart supporter of the status quo -- meaning human oversight of every NYSE transaction by the exchange’s “specialists,” who direct trading in the market’s 2,600 stocks.
“A sea change is coming,” said Junius Peake, finance professor at the University of Northern Colorado’s Monfort College of Business and a perennial critic of the specialist system.
He, DeSano and others contend that the specialists profit at investors’ expense by acting as middlemen in NYSE trades. It would be more efficient, they say, if the NYSE got rid of its costly trading floor and converted to a mostly electronic trading system that automatically matched buyers and sellers in the market.
Electronic markets -- such as the NYSE’s arch-rival, Nasdaq -- have become the norm worldwide in the last decade.
Specialists “have every incentive in the world to take a nickel here and nickel there,” said American Century’s Wheeler.
The NYSE has countered that the specialist system provides investors with orderly trading and efficient pricing. “Studies show that this is the best marketplace for trading our stocks,” said spokesman Ray Pellecchia.
Fidelity, one of the world’s biggest investors and thus a major customer of the NYSE, addressed the issue of trading system reform at a meeting with Reed in Boston on Friday, Fidelity spokeswoman Anne Crowley said. She said the fund company had requested the meeting.
Crowley said Fidelity’s message to Reed was “let’s not lose this moment” when the exchange is contemplating extensive reforms. She declined to characterize Reed’s response.
