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October 12, 2001


What Comes Next for the Stock Exchange?


The New York Stock Exchange is no stranger to trouble.

Over its 209-year history, the Big Board has weathered a civil war, two world wars, the Depression, and even a bombing in 1920 to become the world's largest and most prestigious stock market.

But after Sept. 11, the exchange confronted a threat unlike any it had faced before. The Big Board's headquarters and computer systems survived the destruction of the World Trade Center unscathed, but the attacks shut the exchange by crippling the financial district's communications network.

The exchange reopened only six days later, thanks to the determined leadership of Richard A. Grasso, its chairman, and a herculean effort to repair the communications grid. But the attacks exposed the Big Board's vulnerability to terrorism. With a single physical floor where traders meet to negotiate stock prices, the exchange can be disrupted more easily than computer- based markets like Nasdaq. And the Big Board's columned fašade is one of capitalism's best-known symbols.

Now Mr. Grasso must figure out how to make the Big Board less vulnerable, even as the exchange faces growing competition from Nasdaq and other new trading systems. Already, the exchange says that it may postpone building a long-planned new trading floor and 900-foot tower across the street from its current headquarters. In addition, the Big Board is considering building a secondary trading site outside Lower Manhattan, a plan that could cost tens or even hundreds of millions of dollars.

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The health of the Big Board is crucial not just for its members, but for all of New York, said Charles R. Geisst, a finance professor at Manhattan College and author of "Wall Street: A History" (Oxford University Press, 1997). Over the last two centuries, the exchange has become "inextricably intertwined into New York's economy," Mr. Geisst said.

Mr. Grasso, who never wavered in his resolution to reopen the market as quickly as possible after the attacks, said on Wednesday that the exchange planned to remain a vital part of New York, with its primary trading floor in Lower Manhattan. The exchange could even become part of a broad redevelopment plan including the rebuilt Trade Center site.

To limit disruption in case of future attacks, the exchange will rely on a combination of contingency measures, he said. The most important of those will probably be a second trading floor. The backup site would be on a different power and communications grid than the exchange's main floor, although it might still be in New York City. Most trading would remain at the Big Board's headquarters, but some stocks would trade full-time at the backup site.

Contingency plans might also include agreements to move trading in Big Board stocks to exchanges in Toronto or Chicago. Even the trading floors of major securities firms might work as substitute sites, Mr. Grasso said.

"We are absolutely committed to New York," he said.

But some academics and competitors said Mr. Grasso should rethink his plans. Even before Sept. 11, the exchange's physical floor faced criticism within the industry as an anachronism that benefited the Big Board's members at the expense of other traders and investors.

Instead of building a second floor, said Ananth Madhavan, managing director of ITG, which operates a computerized trading system that competes with the Big Board, the stock exchange should follow the lead of foreign competitors and move trading to an electronic network that would be essentially impervious to physical attack.

"If you were going to reinvent the N.Y.S.E. itself, you would not start with a floor," said Mr. Madhavan, who in 1993 served for a year as a visiting economist at the exchange. "You would do it electronically. The floor is sort of a historical accident."

By moving to a fully electronic network, the exchange would increase the speed of trades and give more investors access to information that now belongs to a privileged few, Mr. Madhavan said. On an average day, more shares are traded on the Nasdaq stock market, which exists only on computer systems and the screens of its dealers, than on the Big Board.

David Colker, chief executive of the Cincinnati Stock Exchange, an all-electronic market that competes with the N.Y.S.E., said physical trading floors are inherently slower and more expensive than electronic markets. With faster computers and data transmission, traders no longer have to meet in person to buy and sell shares, he said.

"With or without this event, our belief is that the world is going electronic."

Mr. Grasso strongly disagrees, and in the last year he has quieted other critics of the exchange. The Big Board already uses computers to process smaller orders, which represent about half of all the shares traded on the exchange. But large orders require human intervention to ensure that they do not cause wild swings in prices, Mr. Grasso said.

"A blending of human and technology in terms of providing services to customers, that's what this is about," he said in an interview last month. "Our model works. No alternative model works."

Investors and companies have voted for the Big Board's structure with their dollars, Mr. Grasso argues. Of the 25 most highly valued companies in the United States, 22 are listed on the exchange. Over the last decade, the Big Board has also become the premier address for international companies that want to sell shares directly to American investors. Nine of the 10 most valued European companies are traded on the Big Board in addition to their home exchanges.

Last year, the Big Board faced pressure to make it easier for other electronic networks and markets to trade its stocks. At a February 2000 hearing of the Senate Banking Committee, the chairmen of Goldman, Sachs and other major securities firms argued that the Securities and Exchange Commission should force the Big Board to give competitors a better chance to trade its stocks.

But Mr. Grasso argued that the commission should proceed carefully, and momentum for radical changes ebbed. Only seven months later, Goldman bought Spear, Leeds & Kellogg, which handles more trading on the Big Board than any other firm, for $7.4 billion.

Now Goldman executives say they are happy with the exchange's current structure. Any backup to the Big Board's current trading floor should be a physical site, not a computer simulation, said Andrew Cader, a managing director at Goldman who is co-chief executive of Spear, Leeds.

Joseph Dellarosa, head of equity trading for Goldman, Sachs, said that the increased threat of terrorism had not taken away the basic strengths of the exchange. "You can talk about a perfect marketplace, but it's hard to fashion one in the real world, and the reality is the markets operate quite well," Mr. Dellarosa said.

Traders on the exchange floor have an advantage over those outside the exchange, because they can see more quickly than anyone else whether stocks are under buying or selling pressure, Mr. Madhavan said. That information is valuable, and if the exchange switched to a simulated floor it would face pressure to give all traders the same access.

"Outside the United States, floors are disappearing really quickly, and automated auctions are the wave of the future," Mr. Madhavan said. "The United States is the lone holdout, and it's the holdout because it has a strong group of dealers who are politically connected."

But Mr. Madhavan said the exchange had adapted to challenges before and would remain strong in the future, whether as a traditional exchange or an electronic network. The Big Board "is a pretty robust organization," he said. "It has survived a long time for good reason."

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