Closing Bell for the NYSE?
Critics call for a major overhaul of the Big Board
The television and newspaper images of the paper-strewn floor of the New York Stock Exchange portray American capitalism at its best: raucous, high-tech, and hyperefficient. The 1,336 traders--many sporting geeky blue, red, or yellow lab coats and sneakers--scurry through a maze of booths plastered with computer screens pulsating with prices. With shouts of "Sixteen bid for 10,000!" and "Sold!" the traders still move more money more cheaply than any other stock market in the world.
But in the past several weeks, the headlines over those pictures have told a tale of American business at its corrupt and perhaps obsolescent worst. Some NYSE traders are battling allegations that they improperly profited at the expense of investors. Electronic competitors of the exchange are setting the stage for a John Henry-like showdown. And a new NYSE reform committee plans to hold hearings this summer on complaints that its officials are too cozily interconnected to police their members. "There's no reason the NYSE as an institution can't adjust," says Jack Bogle, founder of the Vanguard Group, the mutual fund giant. "But it looks grim for the people in the jackets."
Still going. Of course, the NYSE's ability to adapt to crises has disproved previous gloomy predictions. Formed as a private association of brokers in 1792, the NYSE survived the 1929 crash by agreeing to federal regulation and criminal penalties for stock manipulation. Losing investors to then new electronic exchanges like Nasdaq in the early 1970s, the NYSE abandoned fixed commissions and invested heavily in computers to speed trading. And it responded quickly to the 2001 terrorist attacks by beefing up security and backup technology.
Today's threats may be more implacable, however, because the demands for change are coming from the big investors who place the all-important buy and sell orders. What's more, critics are also calling for an overhaul of the NYSE's other crucial, though lesser-known operations, such as its responsibility as a "self-regulatory organization" and its role in setting corporate governance standards.
Last month at a congressional hearing, for example, New York Attorney General Eliot Spitzer lambasted the NYSE for ignoring stock analysts' deceptions. "Inspector Clouseau could have seen" the brokers' misdeeds, said Spitzer, whose subpoenas turned up E-mails showing that analysts publicly touted stocks they knew to be losers. "Self-regulation failed. It was a complete abject failure."
The NYSE was already taking flak as word had also recently gotten out that its board--dominated by the investment professionals and corporate executives the NYSE regulates--had approved a $10-million-a-year compensation package for Chairman Richard Grasso. With its excessive executive compensation and interlocking board structure, "the NYSE looks like the poster child for all the abuses we are supposed to be reforming," says Barbara Roper, director of investor protection for the Consumer Federation of America.
In fact, the NYSE has been a hotbed of scandal recently. Martha Stewart was forced to step down from the board last year to fight insider-trading allegations. In March, the NYSE ignited a firestorm of protest when it nominated Citigroup Chairman Sandy Weill, singled out for tough sanctions in the recent settlement of the analyst scandal, to be a public representative on the board. (Weill withdrew after Spitzer objected.) In April, a brokerage run by the head of the board's compensation committee, Kenneth Langone, was charged with illegally doling out IPO shares to favored clients. "The nicest thing you can say about the NYSE and their performance is that they are set up in such a way that you can't expect them to do a good job," says Sarah Teslik, executive director of the Council of Institutional Investors. "And they have not disappointed us."
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