John A. Thain, chief executive officer of the New York Stock Exchange, wants to turn the NYSE into a diversified, superfast, global operation. His moves, especially a pending merger with the Archipelago exchange that will convert the nonprofit NYSE into a publicly traded company, are shaking up the 213-year-old bourse.
Thain, who boasts an electrical engineering degree from the Massachusetts Institute of Technology, an MBA from the Harvard Business School and 25 years of experience at Goldman Sachs (GS), is also professionalizing management of the exchange. At Goldman, which he left as president to take the helm at the NYSE in early 2004, he led an effort to modernize technology and then helped take the firm public.
The doctor's son from tiny Antioch (Ill.) spoke with BusinessWeek's chief of correspondents, Joseph Weber, at the exchange. Edited excerpts of their conversation follow:
Could you have ever imagined when you were growing up in Antioch that you would wind up here running the New York Stock Exchange?
No, no. When I was growing up there, it was primarily cornfields. I went to a public high school. I never heard about Wall Street, I knew nothing about the New York Stock Exchange, I knew nothing about investment banking. And I had never heard of Goldman Sachs.
How did you get intrigued with business?
I always liked math and science. I applied to MIT...and I thought I would be an electrical engineer. And at that time Harvard Business School accepted about 20% of the class directly from undergrad. And so I applied to Harvard thinking that it was a good mix to have an engineering undergraduate degree [from MIT] and an MBA.
It wasn't until the summer between my first and second years of business school that a friend said, "You know you should come work on Wall Street for the summer because the people are really smart. It's challenging, it's interesting, and you will enjoy it." So I worked on The Street [in investment banking at E.F. Hutton] for the summer. I started at Goldman Sachs in July of 1979. I knew nobody, I had no money, and started basically at ground zero.
What turned you on at Goldman?
If you think about Wall Street and the markets, everything that happens in the world has some impact on what's going on here. And it changes every single day -- the world economy, world events, the geopolitical environment. I just came from Davos and [sat] on a panel with the head of the European Central Bank, the Finance Minister from India, the most important person in Japan in the economic sector. To be able to talk to them about what's going on in the world, the risks, the challenges, and what that means for markets and businesses -- that's incredibly challenging.
You took a pay cut from $20 million down to $4 million a year with this job.
I don't think anybody is going to feel sorry for me, but yes, that's right.
Why? It sounds almost like a mission.
That's right. I wasn't looking to change jobs. The first time [interim CEO] John Reed approached me, I said, "No, why would I ever want to do that? I'm the president of Goldman Sachs, I like what I'm doing. Forget it."
He kind of worked on me over a couple months. The basic argument was, 'The New York Stock Exchange is a very important part of the U.S. financial system. It's an institution with a great history. It's got some problems that you could make a significant impact on and really help correct. And given that you have been so successful and given you have had a great career at Goldman Sachs, why wouldn't you use this as an opportunity to give something back to the system?' And that's really why I did it.
What did you want to accomplish at the NYSE?
When I started I said there are really three things we have to accomplish in my first year: restore investor confidence, focus much more on our customers, and move the exchange to allow more electronic trading to really modernize the way the marketplace works.
We were losing market share and there were investors who wanted to trade in a different way. We really needed to respond to those investors to give them choices. And that's really what [is behind] development of the Hybrid market. A lot of people ask me, 'isn't the Floor going to go away?' And the answer to that is no. Because [the specialists] add value to how stocks trade. But we also have to automate more of what we do here. If we're going to trade five or six billion shares a day, we have to automate what's going on right at the point of sale.
A lot of academics say the Hybrid is going to die a swift and merciless death.
You know, today the specialists are involved in the marketplace as principals only about 10% of the time. The specialists are very supportive of the Hybrid market because they know if we're going to trade five or six billion shares a day, we have to automate what's going on right at the point of sale.
We have 2,780 companies that trade here. There are probably a few hundred of those whose stocks are very liquid and who could trade well in a more electronic way most of the time. But that leaves 2,400 companies that wouldn't trade very well in a purely electronic market because they're not liquid enough.
What are the big challenges for this year?
Getting the Archipelago deal closed and integrating it, getting Hybrid implemented, and we're well along that path. And the third has to do with our strategy.
[With Archipelago] we become a for-profit, public company, and we have a much broader mix of products than we had just by ourselves -- options, a position in the over-the-counter market, a platform that's particularly good for exchange-traded funds, which is a big growing product area. It's a platform that we're going to use to develop a fixed-income trading business.
And it's the ability to develop a second listing brand to broaden our list of companies. Our listing standards will not be as low as Nasdaq's, but we're going to target companies that will list on Archipelago and then as they grow we'll move them to the NYSE. We'll be positioned to compete in the global consolidation that's going on in the exchange space.
Do you intend to push the regulators to get the SEC and the CFTC [Commodity Futures Trading Commission] together?
The markets would naturally want to see linkages between cash and futures. The regulatory separation that exists in the U.S., which is different than say in Europe, creates an artificial separation. Before we can really see the consolidation between those marketplaces we have to deal with that artificial separation. I wouldn't say that this is a one-year fix.
How about Europe?
The three big European exchanges -- Deutsche Borse, the London Stock Exchange, and Euronext -- have all been eyeing each other. There are certainly possibilities of consolidation among the three. If one of those combinations occurs, that really leaves the third one out in the cold.
I do think there are synergies between the U.S. and Europe. I do think there will be consolidations between the U.S. and Europe. And we want to make sure we're well-positioned to be a leader in that consolidation.