NYSE's bell tolls for its trading floor
Electronic deals to replace humans; firms already cutting By
Aaron Elstein Published on August 01, 2005
The New York Stock Exchange trading floor, for decades the symbol of capitalism and of Manhattan's financial power, faces extinction within a year's time.
Once the 213-year-old institution finally bows to market pressures and allows unrestricted trading via computers this fall, its biggest customers will likely execute most of their transactions without human intervention. As a result, the roughly 3,000 floor traders and clerks who now handle about 90% of the NYSE's business will be out of a job.
Firms that for generations have specialized in floor trading, such as LaBranche & Co. and Van der Moolen Holding, are already scrambling to overhaul their business plans.
"Business on the floor is going to dry up within six months," says Christopher Keith, a former NYSE chief technology officer who's now chief executive of ExchangeLab, a Manhattan firm that develops trading technology.
Precedent points toward a quick demise for the floor once an electronic alternative is available. Nearly 20 years ago, the London Stock Exchange began trading shares via computers to supplement trading on the floor. Almost overnight, brokers abandoned the floor; inside of six months, the exchange decided to shut down its centuries-old way of trading.
The NYSE might hang on a little longer. But experts project a sharp drop in business once the exchange starts lifting restraints to trading stocks electronically--a move that will begin in October, pending government approval. Wayne Wagner, chairman of Plexus Group, a Los Angeles firm that advises big investors on where to trade stocks, reckons that as little as 25% of the NYSE's business will be conducted on the floor after the change.
"There's already a real sense of idleness on the floor," Mr. Wagner says.
Even if the floor does go the way of ticker tape, the NYSE is likely to remain the world's leading stock exchange. The difference: Most of its trades will be handled by its computer system or by Archipelago, the electronic trading network that the NYSE is acquiring.
Exchange CEO John Thain thinks there will still be a place for the trading floor in the era of computerized deals, an NYSE spokesman says. While stocks in large companies like IBM trade so often that a person is seldom needed to match buyers and sellers, exchange officials believe that the human touch can help facilitate transactions in shares that change hands less frequently.
Big issues dominate
Trouble is, most of the NYSE's business comes from trading big stocks. The exchange's top 500 issues account for 80% of its trades, according to research and consulting firm Celent Communications.
What's more, it's by no means certain that the NYSE will retain the lion's share of trading in its 2,300 other listed securities. Regulations scheduled to take effect next summer will make it easier for struggling regional exchanges to seize business from the NYSE if they post the best prices for stocks.
If investors turn en masse to electronic trading, Mr. Thain will have little choice but to abandon the trading floor. The NYSE, now owned by the floor traders, will convert to a publicly traded company after it acquires Archipelago. The institution will then have to answer to outside investors, who will have no patience for sustaining an operation that isn't pulling its weight.
Although closing the floor would almost surely provoke a public uproar, it could happen in as little as a year, says Seth Merrin, CEO of Manhattan trading firm Liquidnet.
"People will gravitate to electronic forms of trading. That's what they've done every time they have had a choice," Mr. Merrin says.
The demise of the NYSE floor would affect some of Wall Street's biggest firms, including Goldman Sachs and Bear Stearns. They employ hundreds of traders known as specialists--the auctioneers in particular stocks.
But hardest hit would be LaBranche, the largest specialist firm, and Van der Moolen, another big specialist. They're trying to change their businesses to fit the times and to that end are shedding staff: LaBranche cut 70 employees, or 12% of its workers, in the first half of this year. The road has been rocky; both companies have seen their share prices tumble by more than 50% in the past two years.
Rowland Fleming, who closed the Toronto Stock Exchange floor in 1997 when he was the institution's CEO, says it's natural for floor traders to fight to preserve the business that has served them well. But ultimately, he says, the efficiencies that stem from automation can't be ignored.
"There's no doubt that technology can replicate most if not all of the activities on a trading floor," he says.
©2005 Crain Communications Inc.