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The Bell Tolls for the Big Board

Led by chairman Richard Grasso, the New York Stock Exchange, the heart and emblem of American capitalism, is trading the trading floor as we know it for an uncertain electronic future.

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Starting at around 7 a.m., the 1,315 men and 51 women who trade on the floor of the New York Stock Exchange pour into its Corinthian marble façade, more or less as their predecessors have done for nearly 100 years. While a handful are in standard Wall Street power regalia -- heavy cuff links, bespoke suits -- most of the traders who work on the floor dress like tabloid reporters: They wear jackets and ties because they have to, not because they mean it. Upstairs, in a coatroom off the hallway of the exchange's wood-paneled dining club, many check their sport coats in favor of mesh-backed canvas jackets, because it can get hot running around the floor, or shove their wing tips into cubbyholes to don rubber-soled shoes, since the wooden trading floor can devour shoe leather. By nine, dozens of brokers have drifted back out onto the sidewalk on Broad Street to smoke their last cigarettes before the 9:30 opening bell. Smoking is a relic of the past among the investment bankers and lawyers of Wall Street, but it is still widespread among the Big Board's floor brokers. The Exchange is an anachronism in many ways, the last redoubt of face-to-face human interaction in a digital world. It is still a place where a bright kid from the boroughs who never went to college might land a job as a clerk and grow up to make more than $1 million a year.

But after the 4 p.m. closing bell on Monday, August 2, all that began to change. In the first of three carefully scripted meetings that week, about 400 members gathered in the gigantic boardroom on the NYSE's luxurious wood-and-carpet executive floor -- a world apart from the fluorescent lights and paper litter of the teeming trading floor. Standing under a stained-glass skylight in the chamber's 70-foot-high ceiling and surrounded by oil paintings of the NYSE's former chiefs, chairman Richard A. Grasso told the assembled members that the Big Board could no longer hold out against the Internet's sweeping transformation of Wall Street. In the past two years, a handful of fast-growing new electronic "alternative trading systems" had begun threatening to replace the exchange with cheaper, faster, and arguably fairer automated networks capable of matching buy-and-sell orders and finding prices for stocks. To compete, Grasso said, the NYSE had only one choice: to buy or build a new electronic network of its own. "These have been the best five years in our history," he told them, "and if you take the time to celebrate, you die."

The brokers shifted in their chairs, struggling to imagine just what Grasso had in mind. A short, bald man in thick rimless glasses, Grasso is nobody's picture of an inspirational leader. The members had watched warily over the last few years as electronic trading eliminated smaller trading floors in London, Paris, and elsewhere. Grasso was pushing a plan that the members knew could put many of them out of business and end a 200-year-old way of life.

Since its founding in 1792 under a lower-Manhattan buttonwood tree, the NYSE has operated as a not-for-profit organization owned by its seat-holding members. They consider it a public utility, as well as a handsome living for themselves. Now, Grasso told them, the Big Board needed to sell shares in itself to the public as a for-profit corporation to help finance its new high-tech investments. He had previously resisted the idea, fretting that a public company might put short-term profits over investors' long-term interests. Now Frank G. Zarb, head of the National Association of Securities Dealers, had announced plans to sell its NASDAQ stock market to the public for similar reasons. If the NYSE didn't keep pace, it would risk losing its place as the center of the financial world.

Many floor brokers had their doubts. They knew that converting to corporate form would eliminate much of their control over the Big Board's future. "Once you start doing it on a computer, all this will disappear -- there is no reason to have a floor," says Paul Olsen, a longtime broker. "For 200 years, the members have been able to solve all our problems with the staff, and now the Internet comes along, and they want to make the whole thing electric -- it's bullshit." "It will put a lot of people out of work and clear a lot of taxpayers out of New York, that's for sure," says Robert Hardy, another broker. Grasso didn't say it, but the audience also knew that the exchange didn't need to sell shares to raise money. The NYSE ended last year with more than $700 million of cash on its books, and it could charge the costs of an electronic trading system to members and their deep-pocketed Wall Street firms. These facts gave rise to speculation as to Grasso's real motives. Was the IPO essentially a gambit by Grasso to pay them off to get out of the way, by giving them a chance to cash in their seats for shares?

The members exercised their occupational habit of making quick calculations in their heads. Priced at the same multiple to its earnings as the average stock in the Standard & Poor's 500, the NYSE, Inc., would be worth roughly $3.5 billion -- almost enough to equal the total current market value of all its members' seats.

In a heated question-and-answer session, one member asked a string of seven questions about the future value of his seat; Grasso addressed them in order from last to first, impressing the members with his memory and command of the details. The first Exchange chairman to work his way up through the institution's staff, Grasso had spent 31 years schmoozing with members. He had gotten to know most of them by name, chatting with them on the floor or over bacon and eggs in the exchange dining club. Now he was relying on all of the goodwill he'd built up over the years to bring the exchange's members into the terra incognita of electronic trading. It was a Nixon-in-China moment, and Grasso carried it off. He told them that the NYSE's board would retain Merrill Lynch on a pro bono basis to report back on the possibility of an IPO. Meanwhile, the NYSE might take steps toward building or buying a new electronic network at any time.

For Grasso, a 52-year-old college dropout from Jackson Heights, the next five years are a chance to write history. The advent of electronic stock trading -- not just placing orders online through E*Trade for execution by a human broker but electronically matching orders and finding prices -- is revolutionizing the way stocks are traded. Electronic networks already account for 30 percent of the trades on the NASDAQ; only NYSE rules have protected its volume, by hindering connections to its market and restricting its members' firms from trading its shares elsewhere. The trend toward automated electronic trading promises to dramatically lower the bite Wall Street takes out of investors, from brokerage commissions to mutual-fund expenses. Automated systems operating today charge less than a quarter of the fees an NYSE broker does, and they can provide investors much more direct access to the markets. To prepare, the firms with the most seats on the NYSE floor are becoming its competitors. Goldman Sachs, Morgan Stanley Dean Witter, Salomon Smith Barney, and other giant NYSE-member securities firms are investing in its upstart electronic rivals. Even Merrill, the NYSE's IPO adviser, acquired a 14 percent stake in Archipelago, an alternative trading system based in Chicago. Several of the upstarts are now applying to the SEC to become self-regulating "exchanges" themselves.

The pace of change is quickening. Last week, the Securities & Exchange Commission's chairman, Arthur Levitt, threw his own considerable weight behind electronic stock trading and effectively challenged the NYSE to prepare. In a speech at Columbia University, he outlined a vision of a national electronic stock-market system, in which several exchanges compete with each other to execute investors' trades. To bring it about, he discussed reforming the rules that give the NYSE a near-monopoly on trading many of its listed stocks. And as soon as this week, Frank Zarb is expected to launch another salvo in the war as well -- a new electronic system sharing information about orders among investors and dealers in the NASDAQ stock market.


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