Big Board May Face Identity Overhaul
Far from the end of a saga, Richard Grasso’s resignation Wednesday night as chairman of the New York Stock Exchange raises the prospect that the world’s leading stock market soon could undergo the most wrenching structural changes in its 211-year history.
In the short term, the furor over Grasso’s $140-million compensation may swell further as increasingly vocal critics push for the ouster of the directors who awarded him that sum.
Beyond that, the NYSE must grapple with a host of issues that define its very nature, including the future of its oft-maligned trading system and whether it should be a regulator as well as a market operator.
“We are about to see a sea change at the NYSE,” said Junius Peake, a finance professor at the University of Northern Colorado and an expert on securities markets. “They are going to have to restructure their operation, their culture, their governance and their whole business.”
Grasso’s departure is likely to speed the NYSE’s day of reckoning on many issues because, for better or worse, he largely championed the status quo, many observers say.
To his supporters, Grasso brilliantly marketed the exchange and maintained its dominance against the rival Nasdaq Stock Market and a host of upstart electronic trading systems.
Despite an onslaught of competition, the NYSE still handles about 80% of the trading in the stocks listed on its market. The comparable figure for Nasdaq is far lower.
“No one ever questioned [Grasso’s] ability to do his job. He was superb,” said Charles Elson, director of the University of Delaware’s corporate governance center.
When CNBC and the era of financial cable TV shows dawned in the 1990s, the Big Board let stations broadcast from its floor. Nasdaq was forced to build a site in Times Square to compete for attention.
In an era in which technology revolutionized the trading of stocks around the globe, Grasso protected the NYSE’s historic floor-based trading model in which human intermediaries shepherd stock trades, albeit with substantial assistance from computers.
Until the pay flap erupted, the floor brokers and “specialist” trading firms that are at the heart of the NYSE largely had supported Grasso, viewing his strategies as helping to preserve their livelihoods.
Grasso was one of their own: He began at the NYSE as a clerk 36 years ago, and understood the minutiae of how the exchange worked as well as anyone in its history.
“In my opinion, he was doing an excellent job and replacing him will not be easy,” said Wayne Wagner, chief executive of Plexus Group, a trading consulting firm in Los Angeles.
However, Grasso’s critics have blasted him for maintaining what they say was a veil of secrecy over the exchange’s internal workings. The uproar over his pay has focused attention on the NYSE’s long-standing reputation for limited disclosure about its own operations.
“It’s an onion. You just keep peeling it,” said Andy Brooks, head of equity trading at mutual fund giant T. Rowe Price Associates.
Even as it badgered corporate America to reform policies on issues such as the make-up of boards, the NYSE was violating many of the tenets it was preaching, critics say. For example, the NYSE had long refused to disclose its top officers’ pay. It recanted this year after heavy pressure from the media and the Securities and Exchange Commission.
A basic criticism of the exchange is that it has been run for the benefit of its Wall Street members rather than for the investing public.
Earlier this year, Grasso nominated Sanford Weill, the chief executive of Citigroup Inc., to be a member of the NYSE board representing “public” investors -- even though his firm had paid a huge fine to settle government investigations of its stock analysts. Weill eventually withdrew his nomination after a firestorm of criticism.
“Part of the problem is that the NYSE is still very much an old-boys club where important decisions are made in smoke-filled backrooms,” said Samuel Lek, chief executive of Lek Securities Corp. in New York, which owns three exchange seats.
The most immediate effect of Grasso’s resignation could be an exodus of board members and a revamping of the way new directors are picked.
Twelve of the exchange’s 27 board seats are reserved for securities firms, with a large concentration from the biggest brokerages. Three seats are held by NYSE executives, and the rest are divided among public representatives, listed companies and big investors.
Critics want to decrease the representation of big Wall Street firms, giving more of a voice in part to institutional investors such as mutual funds, which trade stocks on behalf of small investors.
“The basic problem is that the board is dominated by people whose goals aren’t consistent with the NYSE’s goals,” said Jonathan Macey, a securities law professor at Cornell University. “These are broker-dealers who compete, in many ways, with the NYSE itself.”
That sentiment was echoed in an Aug. 1 report by the Council of Institutional Investors, which represents 130 pension funds. The group said the NYSE treats investors as “an unimportant constituency rather than the ultimate one.”
A revamping of the board could lead to a second wave of reform: changes in the way the Big Board trades its listed stocks.
Grasso oversaw a number of technological upgrades during his eight-year tenure as chairman, but critics say it was simply a veneer meant to mislead people into believing the trading system had truly been updated.
Grasso’s supporters say the NYSE method of trading has endured because it is superior to all-electronic systems. The human element, they say, can help dampen stock volatility, especially in periods of heavy volume.
But detractors say the NYSE’s structure allows floor traders to abuse investors through a variety of improper trading practices.
The effect, they say, is that floor brokers and specialists, with their unique insight into stock-trading patterns, can make money at the expense of investors. Indeed, the exchange this year has been investigating whether some of the most prominent specialist firms have engaged in such behavior.
Some observers believe the best way to prevent such infractions is to separate the NYSE’s regulatory operations from the market operations.
The NYSE not only runs stock trading but also polices the actions of the 1,366 member brokerages that own the exchange.
“That’s a huge conflict of interest at the heart of the exchange,” said Benn Steil, senior fellow at the Council on Foreign Relations.
Likewise, the NYSE serves as a principal regulator of the 2,800 companies that list their shares there.
To keep their stock listings the companies must abide by the exchange’s rules on corporate governance -- for example, requirements involving the kinds of matters that must be put to a vote of shareholders.
The NYSE has had to balance some investor activists’ calls for greater disclosure and transparency in the affairs of its listed companies against many of the companies’ desire to avoid more costly regulation.
There is precedent for separating the regulatory function: NASD, formerly known as the National Assn. of Securities Dealers, split off its regulatory function from the Nasdaq Stock Market in the late 1990s.
Another idea that is generating renewed debate is whether the NYSE should take itself public by selling stock to outside investors.
That would force the exchange to be more open about its operations and could eliminate some of the incentives for floor brokers and specialists to engage in questionable trading, some experts say.
But new ownership could culminate in a great symbolic loss: the closing of the NYSE’s historic trading floor at 11 Wall Street. Detractors say the floor is costly and inefficient and that the pressure of public ownership would probably force management to close it in favor of an entirely computerized trading system.
“The new owners would have no incentive to keep that floor,” Steil said.
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Who’s on the board
The NYSE’s board includes exchange officers Richard Grasso, Robert Britz and Catherine Kinney, and the following individuals from the securities industry and the public:
*--* Director Company/organization Term expires Madeleine K. Albright Albright Group 2005 Herbert M. Allison Jr TIAA-CREF 2005 Carol Bartz Autodesk 2004 James E. Cayne Bear Stearns 2004 James M. Duryea J.M. Duryea 2004 Robert B. Fagenson Van der Moolen Specialists 2005 Laurence D. Fink BlackRock 2004 Andrea Jung Avon Products 2005 William B. Harrison Jr J.P. Morgan Chase 2004 Mel Karmazin Viacom 2005 Kenneth G. Langone Invemed Associates 2004 Peter N. Larson Brunswick 2004 Gerald M. Levin AOL Time Warner 2004 John J. Mack Credit Suisse First Boston 2004 H. Carl McCall HealthPoint 2005 George C. McNamee First Albany Cos 2005 E. Stanley O’Neal Merrill, Lynch & Co 2005 Henry M. Paulson Jr Goldman Sachs Group 2005 Philip J. Purcell Morgan Stanley 2005 Christopher C. Quick Fleet Specialist 2005 Juergen E. Schrempp DaimlerChrysler 2004 Larry W. Sonsini Wilson Sonsini Goodrich & Rosati 2005 William B. Summers Jr McDonald Investments 2004
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Source: New York Stock Exchange
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Staff writer Tom Petruno contributed to this report.
