JOHN THAIN, chief executive of the New York Stock Exchange (NYSE), speaks admiringly of the sleek organisation of his transatlantic counterparts. Big European bourses, he notes, may be consolidated geographically; offer a vast array of products; and do their own clearing and settlement as well as trading.
Despite being the world's largest equity exchange, the NYSE looks flat-footed by comparison. It is stuck in one country (indeed, one city); specialises in equities, to the exclusion of other products such as derivatives; and cannot clear or settle. The exchange also relies on floor traders for handling 90% of share volume. Many other exchanges—in America as well as Europe—have long since gone electronic.
All this could change. Modernisation is first on the order of business. Trades on the floor of the NYSE currently average 14 seconds, an absurdity in the automated age. So over the next year the NYSE plans to expand its electronic-trading capabilities to be able to process larger orders (the Securities and Exchange Commission will presumably go along with the plan). The end result is supposed to be a hybrid market that seamlessly meshes floor trading and electronic trading, as happens at the Chicago Mercantile Exchange, America's largest futures exchange.
Mr Thain dares not guess what proportion of trades will migrate to the electronic system, though the highly liquid stocks of big companies seem sure to switch over. Even those, however, may revert to the floor during crises—times like last month, when Merck withdrew its hot Vioxx drug and sellers vastly outnumbered buyers.
Even if the hybrid system rolls out smoothly, the Big Board faces daunting strategic questions. Like rival equities exchanges in America (not to mention London), the NYSE is struggling. Low volume and volatility have put off broker-dealers. The seat price (ie, the price of membership) has fallen by almost two-thirds in the past five years, despite ticking up a notch last week. Mr Thain readily admits that it is “hard to make money on the floor”.
How can that be changed? Offering new products is an obvious way to go. Already the NYSE is trying to elbow more into exchange-traded funds (ETFs), perhaps at the expense of its neighbour, the American Stock Exchange (Amex), where these popular, index-based securities got their start. The Amex has more than 120 ETFs listed, versus 17 for the NYSE. Last month an ETF based on China's Xinhua 25 index began trading on the NYSE. The SEC is expected to approve a new gold ETF. This is eagerly anticipated by investors, and the Amex plans one too. The Big Board is also looking at prospects in fixed income (eg, convertible bonds) and derivatives, perhaps based on listed companies.
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