Last Days of the Club?

Strange at this might seem, the future is on the walls of the New York Stock Exchange: a classical

future, a prosperous future inspired by fashionable columns, enlightened art and a trading floor that is, what can I say, about as idiosyncratic but as fundamentally decent as the running of the bulls – pun intended – in the south of Spain. The critics have been unkind. In an age of advanced electronic trading, an age in which ECNs and alternative trading systems siphon off more than 40 percent of Nasdaq order flow, it is rumored that the Big Board's days are numbered. It is suggested that the Big Board is about to die. It is about to see its listed order flow siphoned off by the ECNs and their allies in the stock exchange game. One critic can provide some historical perspective. "The New York Stock Exchange may still be today's natural monopoly," the critic decrees (no, it is not Traders Magazine's cranky columnist Gregory Bresiger, a scribe who calls me sir on a Monday morning after some Enron shares postpone his retirement plans), "but the new electronic OTC marketplace which is emerging will almost certainly be tomorrow's" [natural monopoly].

The critic contends that new computer technology poses a second, even more serious, threat to the NYSE. "If applied to the antediluvian, paper-ridden NYSE floor," he writes, "it clearly has the potential to disrupt entrenched power relationships within the exchange and put many members out of business. Technology's most severe disruptive potential, though, lies in its application to the over-the-counter market."

"Until now the OTC market has never been a match for the NYSE in trading active issues," the critic adds. "Disjunct and disorganized, it lacked the exchange's advantage of a central location. It also lacked the exchange's auction mechanism which is so efficient in executing small orders… [But] eventually Nasdaq could evolve into a facility combining a new automated auction mechanism to serve individual investors and a block mechanism suited to institutions…."

Many will recognize this passage from a seminal work, The Last Days of the Club by Chris Welles, (E.P. Dutton & Co.), a page turner that carried the NYSE's premature obituary. But what may surprise some is that it was published in 1975, the year the National Market System was enacted. If Welles' narrative was compelling, his prediction was off the mark. The NYSE, relatively speaking, has actually multiplied its share and trade volume by an extraordinary number. Nasdaq did not bury it. Nasdaq has thrived, blossomed in the intervening years, and the third market – probably one of the great threats the NYSE faced – continued but it did not bury the Big Board either.

What I am driving at is this. There are more to phoney forecasts, press releases and hysterical headlines on the demise of the NYSE, (and for that matter the demise of market making, the demise of Nasdaq, the demise of American life, if you will) than the print on the paper. So examine the walls. Don't let these stories do an Enron on you. The decade ahead will be the decade of three dimensions, and solid walls. Sure, there will be mud wrestling over who controls market data, about who processes customer trades and who ultimately executes customer orders. But until the lights are shut off down on the Big Board, I for one will consider rumors of its demise greatly exaggerated.

John A. Byrne