The human touch faces competition's automation


January 12, 1992|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

New York -- When businessmen first met under a tree in lower Manhattan to swap government debt and, inadvertently, create the New York Stock Exchange, Washington was located across Wall Street. Not the place, the president.

To celebrate the 200th anniversary of that meeting, the exchange last week began a yearlong party marked by the kind of flag-waving more commonly associated with elections. Bunting hung from balconies above the vast trading floor in the exchange's ornate headquarters and an in-house volunteer band, "The Upticks," sang patriotic songs.

The exchange had many reasons for good cheer. 1991 was a very good year on Wall Street. Investors and brokers have been making money. And the NYSE has received some important new listings, most notably by the conglomerate Berkshire Hathaway.

But there were some sour notes amid the exchange's celebration.

Mushrooming competition, the U.S. economy's slow growth, and conflicting desires of its own members have taken a toll on the exchange's position as the capital of capital. Its U.S. market share has withered, and price of membership on the exchange has fallen by almost a third since the 1987 market crash.

Meanwhile, new technology has sparked the growth of competing exchanges. Human beings, the backbone of the New York exchange for two centuries, have been squeezed out of other exchanges here and abroad.

At an exchange anniversary in the near future, the only sound may be one computer humming to another.

Despite such underlying concerns, the New York exchange retains some crucial characteristics that have made it the world's largest, most powerful exchange.

Many corporate executives, such as Berkshire Hathaway's Warren Buffet and others at Nike, Circuit City and Liz Claiborne, recently shifted trading in their company's shares from the automated market run by the National Association of Securities Dealers (NASD) to the NYSE. One reason: They believe the New York exchange provides -- as exchange officials always have argued -- the fairest pricing and deepest pool of participants.

Technical issues? Hardly. Fair pricing enables securities to be traded free of manipulation, at broadly held values -- characteristics of tremendous value to an economy and a society. For small investors, the NYSE provides the same prices and treatment that it accords to the largest customer.

Outside the New York exchange, buyer beware. Less visible markets, most notably those for municipal bonds, afford brokerage firms legal opportunities to sock small investors with miserable prices and collect huge trading profits.

How? With no central point for trades, there's no common bid. For example, some brokerages handle small municipal bond orders from retail customers by buying and selling from inventory. What value do they use? There's a lot of room for discretion.

The NASD market, which operates via a network of computers in thousands of brokerage offices, contends it offers pricing performance equal to the NYSE's. And many customers -- both companies and investors -- agree.

Still, a number of brokers at major firms, speaking anonymously on issues that would imperil their positions, say getting good prices on NASD market stocks for clients can require tussling with their own trading desks.

Why? Again, with no central market, traders can play sophisticated games. Orders can be delayed, or the occasionally wide spread between bid and asked prices can be exploited, boosting profitability for the firm.

For society, the issue is even more compelling.

Pricing is a key element in the allocation of resources. The ability of a market to efficiently and fairly bring together providers and users of capital determines control over vast segments of an economy -- including which areas are nurtured and which are shunned. The consequence of corrupt or inefficient markets: corrupt and inefficient economies.


When the NYSE began, tradeable securities were few and competition limited. It was more than a half-century before the first telegraph line was established, providing an advantage to the market closest to the largest concentration of business.

When better systems emerged, the New York exchange had a lock on trading in the shares of major companies.

Its scandals, arrogance and dispassionate juggling of corporate control were legendary. Even current exchange Chief Executive William H. Donaldson recalls that he was subject to the exchange's smugness back in 1959 when he sought to establish a firm, the now-prominent Donaldson Lufkin Jenrette. "They asked what I thought I was doing," he says.

Times, though, have changed.

The Securities and Exchange Commission passed a number of rules to undermine the exchange's exclusive hold on listings. Some investors prefer new systems or overseas markets where rules are more lax. And some firms use trading systems that take pricing data from the New York exchange, but don't charge the (( pennies-per-share transaction fees that would come with trading the exchange.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.