NYSE Chief Sees ‘Opportunity’ as Rival Markets Opt to Merge

Richard A. Grasso, 51, has been chairman and chief executive of the New York Stock Exchange since June 1, 1995. As such, he presides over the world’s largest and best-known stock market.

Now, with the planned merger of the NYSE’s archrival--the Nasdaq Stock Market--with the American Stock Exchange, an old debate has been resurrected: Which is the best type of market for companies and for investors: an electronic network such as Nasdaq, which links brokers and investors nationwide via computers? Or an “auction” market such as the NYSE and Amex, where brokers meet face-to-face as agents for buyers and sellers and where a single dealer, or “specialist,” is responsible for maintaining an orderly market in each stock?

Grasso, who visited Los Angeles last week, spoke with Times staff writer Tom Petruno.

*

Times: Did the NYSE and the Amex ever consider merging?

Grasso: They [the Amex] have been looking at their choices for the last several years. As recently as a year ago, we did have a discussion. The reason that it didn’t go very far is that if you look at the Amex today, it has a very good options business--and we were exiting that business. [The NYSE sold its options business in 1996.]

The Amex’s equities business really only has a handful of names that we would aggressively pursue. Only three of those we would call hotly pursued companies: Viacom, Hasbro and Cablevision Systems.

So the attractiveness to us, having made the decision to exit the options business, was not what it was to the NASD [National Assn. of Securities Dealers, Nasdaq’s parent].

*

Times: The NYSE has made a huge push in recent years to list stocks of major foreign companies that want to trade in the United States. Nasdaq, with the Amex, now can offer those companies both an auction-type market and an electronic dealer-operated market. Is that a major competitive threat to your foreign business?

Grasso: You never treat lightly the competitive winds shifting dramatically. But the reality is that as we look at our international marketing opportunity, our targets tend to be companies with market values in excess of $100 million . . . and very significant earnings power. Those don’t tend to be the types of companies that, once they decide they’re going to register in the United States, seek alternatives [to the NYSE].

What most international companies are looking for is . . . they want to be with the “brands.” And one indication of brand strength is to look at market capitalization. The NYSE companies have $12 trillion in market cap. If you combine Amex and Nasdaq, it’s $2 trillion, maybe a little less.

*

Times: The NYSE auction system has become much more automated in recent years, of course, but for each stock, brokers can still represent buyers and sellers on the floor and a specialist is responsible for maintaining order. How do you see the system changing over the next decade or so?

Grasso: Take a look at what has happened in the last 10 years and how dramatically different the market is today. Ten years ago, there were 200 electronic “books” on the trading floor handling about 400 stocks. Today there are more than 600 books handling all of our orders, and each of those has now become a “mailbox” for our order-routing network.

That network for the last three years has been pushed down to every broker/dealer’s sales force that elects to use it, so that today, on an average day where we do 635 million or so shares, 80% of our transactions, representing 40% of our share volume, is done through the network [routing orders direct to the exchange floor, in seconds].

If you look at the one generic characteristic of what enhances one’s competitive position, we’re a mover of data. The quicker we move the data to the customer and stimulate the customer’s behavior in the form of orders, the more competitive and vibrant we are.

The market will evolve and change, and we’ll continue to deploy technology to create strategic and competitive advantages for us. But fundamentally at the point of sale it is the auction that differentiates us from other types of markets, including the dealer market.

Ours is not an automatic execution system, and it is not a vertical price discovery system, meaning every buyer pays the prevailing offer, every seller hits the prevailing bid. When a difference greater than one-sixteenth separates the prevailing bid price from the prevailing offer, between 30% and 40% of the time you’re going to get a price better than the prevailing bid and offer [because of the specialist’s presence and floor brokers’ interaction]. That’s what differentiates us.

*

Times: Of course, Nasdaq has changed its rules to allow better execution of customer “limit” orders, or orders inside dealers’ prevailing bid/offer spread. And the Pacific Exchange was the first to announce plans to adopt the OptiMark System, a new automatic trading system that supposedly will offer very sophisticated computer-driven matching of buy and sell orders. The Internet also offers the potential to match buyers and sellers at the best price.

Might the NYSE’s future involve much more of that type of automated matching, or “crossing” of orders--eliminating the need for a human middleman to be involved?

Grasso: I think the question becomes how do we continue to define our own relevance? If you look at the embedded technology we’ve created, you must know that it won’t be all that difficult, to the extent it is to our competitive advantage, to deploy such a technology. We’re the logical ones to do it.

I think the beauty of what you’re talking about happening in terms of the online revolution is that you’re bringing more people into the process. The more people you bring in, the bigger the market becomes and the more opportunity there is for companies and for markets and for investors. I don’t look at it as a strategic threat; I look at it as a competitive opportunity.

Will [the NYSE] look the same in the future? No. Will it be an auction market? Yes. Will it involve human interface? Yes. Again, wrapped in with state-of-the-art technology.