Commentary: NYSE: How Deep Will Reform Run?

Revamping the way the Big Board works may not happen on John Reed's watch

The long wait is just about over. Word has emerged from the New York Stock Exchange in recent days of the exact shape of much-awaited changes in the governance of the 211-year-old institution. In meetings with the Big Board's owners -- who control the 1,366 seats that bestow the right to trade on the floor -- interim Chairman John S.

Reed has laid out a dramatic overhaul of what was once almost a private club for former CEO Richard A. Grasso. The unwieldy, 27-seat NYSE board will be trimmed down to 8 members, with securities-industry representatives sitting on a separate board -- and the NYSE's much-criticized regulators reporting to independent directors.

The toughest job is likely to await Reed's successor. Institutional investors are pushing for significant, lasting changes in the way the NYSE operates. But Reed will only go so far. Yes, the former Citigroup chairman is expected to crack down on floor abuses, such as traders who trade ahead of customer orders. But he has also told NYSE members, both publicly and privately, that he is not about to fundamentally alter the way the exchange does business. Thorny issues surrounding the specialist system, which critics have long contended is antiquated and unfair to large traders, are not under consideration. That's because reforms, if not handled gingerly, could endanger the survival of the exchange -- and would never pass muster on the floor. While exchange members say they are resigned to beefed-up enforcement -- a likely outcome of changes in governance -- Reed's more moderate approach has gained him needed support among traders. Says member George Morris: "He has definitely won over the floor."

THERE'S NO DOUBT that the governance moves Reed is proposing, which will be put to a vote of members on Nov. 18, will make the board a far different body than it was under Grasso. Clearly, the days of $140 million pay packages are gone. Floor brokers and specialists, a notoriously change-averse bunch who manage the buying and selling of stocks, have been far more worried that Reed or the new board may push for changes that could cut into their dominant position in U.S. stock trading. Critics, including institutional investors, have pushed to ramp up the pace of automation -- or even replace specialists with the kind of dealer-based system already established at most other stock exchanges. John C. Bogle, founder and ex-CEO of Vanguard Group and a director of the Instinet electronic-communication network, would like to see Reed open up the exchange to competition from ECNs. And many institutions are also pressing for an end to regulations that, they say, force traders to route orders to the NYSE floor.

But any such moves are off the table while Reed is running things. Bogle says Reed is "maybe a little too conservative, a little too status quo-oriented." Some institutional investors are unhappy with the pace of reform and with public remarks by Reed indicating that major changes are unlikely. Sarah Teslik, executive director of the Council of Institutional Investors, says that while some early Reed remarks led to optimism that he would address the institutions' core concerns, it now appears "that's not happening" -- which, she says, has disappointed some members.

ULTIMATELY, THE FUTURE shape of the NYSE will depend on who succeeds Reed and who ends up on the new board. One person close to the current board says possible candidates include people familiar with the financial-services industry but without direct ties to the NYSE: current and former Securities & Exchange commissioners and Federal Reserve executives, for example. Reed has readied the way for his slate of candidates by showing a savvy approach to internal NYSE politics. According to members familiar with his discussions, he has said that a board seat may go to a powerful constituency that was neglected by Grasso: members who lease their seats to others. Such moves will reinforce Reed's power base. But if he is to truly erase the legacy of Dick Grasso, Reed must do more to assure the public that his slate of reforms will be followed by a hard look at serious structural change.

By Gary Weiss

With Joseph Weber in Chicago and Faith Arner in Boston

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