Streams

Future of the New York Stock Exchange May Hinge on Its Past

Friday, December 21, 2012

The New York Stock Exchange is more than just a place where stocks are bought and sold: it’s the symbol of American capitalism. 

Its sale to the Atlanta-based Intercontinental Exchange or ICE for $8.2 billion marks the steady decline of an institution that was once the center of the financial system. 

Since the 1970s, the NYSE’s monopoly on market transactions has been steadily eroding.  Fifty years ago, 80 to 90 percent of the trading in the U.S. of stocks and bonds happened on the exchange.  Now, that number is about a quarter of the stocks listed at the exchange. 

The images on television of traders at work on the floor of the exchange are more optics than reality. 

“What you are looking at today is nothing more than a visual representation of American market capitalism,” said Charles Geisst, a finance professor at Manhattan College and author of Wall Street: A History.

The decline started after fixed fees came to an end in May 1975 and commissions for security transactions began to fall. The rise of electronic trading and other exchanges where investors can make lower-cost trades have also taken business from the two-centuries-old NYSE. 

Profits have also shifted away from traditional buying-and-selling of stocks and bonds to more complex financial products like derivatives, options and commodities. Those are areas the exchange had little exposure to until it expanded into European exchanges. 

The sale to ICE could revive the exchange. 

“The New York Stock Exchange needed to do something like this because of all the ground it was losing,” said Richard Sylla, an economics and financial history professor at the New York University’s Stern Business School. “What this may do is revitalize it, make the combined entity, NYSE –ICE, if that’s what it’s called, into more of a major competitor”

For average investors, there won’t be any noticeable changes when buying mutual funds or selling an IRA.  

As for the building and the trading floor, Geisst believes it could become a sort of museum that shows how trading works.

“What it is useful for is to explain to people this rather complicated process of buying and selling shares, of the various rules that have been introduced over time,” he said. 

“If one could look at that floor of the exchange, especially specialists and floor traders in operation fulfilling customer orders, than least one would have some visual representation of what exactly was going on.  It’s very difficult to explain that in electronic terms. In fact, you probably can’t.”

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