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August 31, 2003

The Big Board for Everyone?

By Gregory Bresiger

The NYSE floor-based trading system is not maximizing the interests of those who actually own the order flow so its ownership base should be expanded. That's according to a scholar who has been studying market structure and recently sent a letter to the Special Committee on Governance of the NYSE.

Benn Steil, a senior fellow with the Council on Foreign Relations, is calling on the NYSE to "revisit" the issue of demutualization. The latter is an option that, he says, would solve many cost and potential conflict of interest problems.

"First, the endless public and regulatory debate over whether the NYSE chosen market structure exists to serve the interests of investors or those of the intermediaries that currently own the exchange would become moot," Steil wrote.

"Second, the compromise and consensus that now dictates how the interests of the Exchange's owners are reconciled with those of the investing public would be replaced by a governance process which ensured that this conflict did not exist in the first place," he added.

The Big Board's ownership structure would be improved by having "nonintermediaries" included in the decision making process. Steil noted that his research with industry expert, Ian Domowitz [now with ITG], calculated that a 10 percent decline in trading costs in the major U.S. and European equity markets results in an eight percent higher turnover. "If this is even a modest approximation of reality, it is clear that a commercial NYSE would, in its own interest, choose a market structure that encourages investors to trade by eliminating any unneccessary intermediation costs," Steil wrote.

Steil is confident the NYSE is listening. "They seemed to give me a respectful hearing," Steil told Traders Magazine. However, he believes that the committee has no intention, at this point, of accepting his reforms. "But if the NYSE were to lose market share, if the price of seats were to start to drop, then I think that my ideas might be used," Steil said. Steil's comments come as the NYSE puts on a brave face following an examination of controversial floor trading practices by the Securities and Exchange Commissions and the exchange itself.

The NYSE said the committee will unveil its recommendations soon.