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The Bell Tolls for the Big Board

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Leaning back in an armchair inside his palatial office in the Big Board's executive suite, his French cuffs dangling loosely around his wrists, Grasso talks about his approach to the members like a tough parent bringing up sometimes shortsighted kids. "Sure, the changes now are going to be wrenching, and of course change is resisted," he says. "But the one thing they understand down there is winning. I tell them, if you think you are going to do business in '01 the way you did in '99, you are woefully wrong -- not wrong for me; wrong for you, for your kids, and for your grandkids. You know, no matter how good a blacksmith you were at the turn of the century, if you wanted to remain a blacksmith, you were in trouble."

But Grasso also knows he has to be careful, because any major change needs the approval of two thirds of the members. "I want you not to get the impression that I am in the business of cannibalizing the current model -- I am in the business of reinventing it," he says, slipping back into his everyday role as the NYSE's salesman-in-chief. "This place is very different from anything else on the face of the earth, different from any of those exchanges in Europe. We bring together 70 million investors -- some are massive, some are minute, but they rank equally, they have the same speed of access to prices, they have the same opportunity to compete for execution. Is there a piece of software that can replicate what we do here? Not right now. Is there going to be? Probably. And if anyone is going to deliver it, it is us."

Aside from talk of the possible IPO, the summer of 1999 was the quietest in recent history on the NYSE trading floor, says Bernie McSherry, a longtime floor broker, as he walks briskly through a maze of brokers' booths, trading posts, and telephone clusters mounted on poles. It's early in the day, but the floors are already strewn with paper, and uniformed staff are carrying out the first of many trash bags full of empty Coke bottles, chewing-gum wrappers, and foam cups. The fluorescent and halogen lights cast a ghostly glow over the tourists looking down from behind glass in the galleries above. An ancient POW-MIA flag hangs on a wall, a nod to the large number of veterans working on the floor.

McSherry, a boyish 42-year-old with a round, reddish face, is the son of a Staten Island police officer. When he was in accounting school at Staten Island's Wagner College, a friend got him a job as a clerk at the American Stock Exchange. He graduated and found work as an accountant, but on his first day, he quit out of boredom. "All I could think about was how much fun I was having back on the floor," he says.

The small securities firm he worked for eventually moved him to the NYSE. After the crash of 1987, the firm "got cold feet," so McSherry persuaded it to spin him out as an independent and let him assume the lease on his seat. (Many floor brokers own their seats, which carry the right to trade on the floor and these days sell for about $2.6 million; others lease from inactive members who live off the income.) The $13,333 a month in seat rent was tough at first. He spent $2,000 on a week's vacation with his family at the Grand Canyon and couldn't help thinking that his empty seat was costing him another $3,333. (Seats lease for about $250,000 a year today, and since no one else can use a seat while a broker is off the floor, even smoking breaks can be expensive.) It was rough going, McSherry says, until a former colleague joined a major investment firm and began sending him trades.

The roughly 400 independents like McSherry are known as $2 brokers, because their commissions were once fixed at $2 per 100-share trade. Congress ended fixed commissions altogether in 1975 as part of the legislation that set in motion the competition among brokers and markets now roiling Wall Street. Today, commissions on the Big Board are negotiated with each client. They typically run about $1 to trade 100 shares for a client, but they can run below 30 cents per 100 shares for a big institution. The best $2 brokers are highly sought-after and make the most money on the floor, pocketing well over $1 million a year in good times, even after the expenses of leasing a booth on the floor and paying clerical staff. "House brokers" who work for firms like Merrill or Goldman are paid a salary of about $150,000 a year as well as a hefty incentive bonus.

Trading on the floor is "a relationship business," as any broker will tell you. It's based largely on trust; many brokers do $100 million in business a day without signing a single contract. Honoring oral agreements is the easy part, however. The art of trading, on the floor as elsewhere, is about information. Every time McSherry approaches another broker with a bid to buy or an offer to sell shares, he makes himself vulnerable by revealing his intentions. The other broker could trade ahead of him, taking advantage of the impact his buying or selling will have on the price. (You've got a big order that will bid up the price? Maybe I'll just buy some first . . .) If McSherry has been a buyer in a stock, a friend may track him down when an order to sell comes in, even if McSherry is out grabbing a smoke. But a spiteful broker will take the trade elsewhere if he can, embarrassing McSherry in front of his client. "There have been vendettas between brokers down here that have lasted whole careers," he says.

The striptease of concealing a client's intentions is a broker's most important skill. If a client wants to sell 5 million shares of Lucent Technologies, McSherry might split it up, selling it piece by piece so potential buyers don't see the magnitude of the sale. If they sense its size, buyers will pull back; his sales are likely to lower the price, letting them buy more cheaply later. A large trade's impact on the price of a stock can add much more to a big fund's trading costs than paying a broker's commission. "You have to understand how someone you are trying to trade with operates," says Joe Cangemi, a floor broker who got his start in the business from the NYSE member whose lawn he used to mow growing up in Queens. "I might tell a client, Don't buy now, this guy is a sloppy seller, he is going to do a bad job and it will hurt the stock. You'll get a better price later."


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