This Blow May Bolster the Big Board
By Gary Weiss
If the trading floor is the heart and soul of the New York Stock Exchange, the Big Board's announcement on Oct. 16 was a dagger to the heart. Five of the seven NYSE specialist firms -- which have a monopoly on stock trading on the exchange floor -- have been informed that "disciplinary action" will be brought against them for allegedly trading ahead of customer orders and otherwise taking advantage of their privileged position on the trading floor.
It seems like awful timing by the Big Board, doesn't it? In the past few days, mutual funds and other institutional investors have been clamoring for changes in the specialist system, which many institutions have long criticized for trading practices that allegedly rip off customers (see BW Online, 10/16/03, "Under the Gun at the Big Board"). Institutions are also pressing for splitting off the exchange's regulation from its operations, a step opposed by the NYSE interim Chairman John Reed.
RECIPE FOR FAILURE?
In fact, the timing may not be so bad at all -- at least, not for exchange officials who are clamoring to prevent just the kind of far-reaching change that critics are seeking. For one thing, the disciplinary actions are obviously intended to prove a point that Reed has made several times: Empowering outsiders who don't have the technical expertise to spot wrongdoing would be a recipe for regulatory failure. "If specialists misbehave, you have to be a practiioneer to know it when you see it," Reed testified before a House subcommittee on Oct. 16. "We aren't perfect regulators, but we are quite good at it."
The penalties themselves have not been announced, but they're said to be significant -- press reports say they may be as high as $140 million. If so, that would tend to substantiate the view that the current enforcement scheme works well.
True, the impending disciplinary action is an embarrassment to the specialist system itself. And the massive penalties could give ammunition to critics who contend that the floor-trading system is fatally flawed. But by proving that the exchange can police itself, NYSE traditionalists now have a strong counterargument.
In the days of Dick Grasso, the NYSE was often accused of arrogance. Today it is humbled. But exchange's enemies have little reason to rejoice in this latest bit of bad news for the NYSE. The 211-year-old institution may well turn out to be the embodiment of the old adage, "that which does not kill me will only make me stronger."
Weiss is a senior writer for BusinessWeek in New York
Edited by Douglas Harbrecht