Last year, the New York Stock Exchange surprised the financial world by declaring that it would offer shares to the public. But the Big Board is now having second thoughts, according to NYSE officials.
Although an initial public offering is still an option, the NYSE -- which is now a private, membership organization -- is also studying whether less radical steps might be more effective in staving off mounting challenges to its business.
Last summer, after Nasdaq Stock Market head Frank G. Zarb electrified Wall Street with his declaration that Nasdaq would be converted to a for-profit entity, NYSE Chairman Richard A. Grasso upstaged his key competitor by declaring that the NYSE would launch an IPO by Thanksgiving.
In September, the NYSE board, in essence, said Grasso had jumped the gun and the IPO wouldn't take place until 2000. But Grasso stressed just a few weeks later, in testimony to the Senate, that an IPO was ''critically needed to assure the continued competitiveness and position of the NYSE as the world's pre-eminent equity market.''
Since then, however, that has not been so clear.
The problem: The NYSE was designed as a members-only club, with rules written to provide a trading environment for members far superior to any other stock market. The idea was to force every order for an NYSE-listed stock to one place -- a trader on the exchange's floor known as a specialist.
Armed with knowledge of every trade on the table, specialists are able to make healthy profits. In return, they promise to keep buying and selling stocks to help hold prices within a tight range. The result has been the world's largest and most successful stock market, a well-oiled machine that handles billions of dollars in trades daily with minimal problems.
This contrasts sharply with the structure of its main competitor, Nasdaq. Instead of a trading floor, Nasdaq has massive computers located in Trumbull, Conn., that link hundreds of competing trading centers. It is a far more open model.
Harold Mulherin, a finance professor at Penn State University, compares the NYSE to Microsoft because of its decision to pull everything under one roof. And like Microsoft, the NYSE's business model is politically incorrect at a time when monopolies are the villains, and transparency and competition the buzzwords. It also must contend with new technologies that are faster and cheaper to use, enabling competitors to blossom.
The NYSE has formed a committee of board members, co-chaired by Alex Trotman, former chairman of Ford Motor Co., and Clifton R. Wharton Jr., former chairman of TIAA/CREF, to study these issues. Its officials are also examining the London Stock Exchange and other foreign stock markets that have converted or are contemplating a conversion from membership organizations to for-profit companies -- a process called demutualization. The change has generally made it easier for exchanges to raise money and cut deals.
But Robert A. Schwartz, a finance professor at the Baruch College of the City University of New York who has served as an adviser to both the NYSE and the Nasdaq, said that all of the overseas exchanges were electronic, so their experiences are not applicable. NYSE members can have conflicting concerns -- the human specialists on the trading floor have an interest in ensuring that all trades continue to be funneled to a central location, while the brokerage firm members placing orders only have an interest in getting the best prices and fastest execution.
''Demutualization, which may work for some other markets, could be the end of the NYSE's dominance,'' Schwartz said. He noted that the NYSE said it plans to use the money raised in an IPO for an electronic trading system. But he said a truly effective electronic system could wipe out the trading floor, the heart of the NYSE. ''The NYSE will not beat the alternative markets at their own game.''
In addition, the Securities and Exchange Commission has indicated that a for-profit NYSE would have to spin off its regulatory arm. But many companies list on the NYSE because they want a stamp of approval, a brand name that signifies a company has met significant regulatory requirements.
Furthermore, many competitors also argue that if the NYSE becomes a for-profit competitor, it should have to share its trading information more cheaply and extensively and link up with other markets more tightly. These changes would deprive the NYSE of special competitive advantages.
NYSE officials currently are struggling for a business strategy.
''We have off-site meetings and sit down with a blank sheet of paper and try to reinvent ourselves,'' James L. Cochrane, senior NYSE vice president, said at a recent American Enterprise Institute conference. But he said the problem is that any approach could cannibalize the NYSE's major sources of revenue.
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