Commentary: There's A Floor Under Those Seats

If the price of an NYSE membership is any guide, traders' livelihoods are secure

Numbers have been flying around the New York Stock Exchange since May 3, when it released its 2003 financials. There's $36 million, which the Big Board is setting aside in case it loses its fight against the compensation claims of former Chairman Richard A. Grasso. Then there's $19 million, which the exchange will have to hand each of its co-presidents, Robert G. Britz and Catherine R. Kinney, if they retire at age 55. A few days earlier, however, another number emerged that received scant attention but was as significant as all the rest: $1.51 million. That's the price of an exchange membership, or "seat," as of Apr. 27, which was the last time one of them changed hands.

The prices of NYSE seats are usually sheer esoterica. But not this time. That's because they have barely budged for more than six months, a period of unprecedented tumult at the 212-year-old exchange. At a time when you would expect that members would have been dumping their seats, they have reacted with studied indifference. What's going on? Have NYSE members lost their senses? Or could it be that the media brouhaha surrounding the NYSE's fate has been seriously overdramatized, and that the people who know best -- the owners of the exchange, including the people who run trading operations on the exchange floor -- believe that their franchise will remain pretty well intact?

Here's a safe bet: Put your money on the insiders. As one NYSE specialist says, the move toward electronic trading and impending market-structure changes "don't run counter to the interests of the exchange. Trades will still be executed on the floor. Yet the press plays it up like our world is coming to an end." True, seat prices are also sustained by an effort, long dormant but now heating up among seatholders, to "demutualize" the NYSE and allow members to sell stakes to the public. But that idea, which first surfaced under Grasso, remains a long shot, with NYSE officials still undecided.

No, the main reason seat prices have held steady is simply that exchange members are blasé about all the widely publicized market-structure reforms and regulatory steps that have taken place since Grasso left. Even with the NYSE's market share slipping a couple of percentage points late in 2003, seat prices have remained firm, and so has the cost of leasing a seat, which is about $180,000 a year. "An NYSE seat is an undervalued asset," argues George Morris, a longtime seatholder.

Floor traders don't hesitate to unload their seats when their livelihoods are in danger. At the American Stock Exchange, a stock and options market whose members have seen their income hurt by an onslaught of competition, seats now sell at one-seventh of the $725,000 they commanded as recently as 2000. Likewise, NYSE seatholders got rid of their seats when their longtime patron Grasso self-destructed. But since the Grasso mess subsided in November, seatholders have yawned at all the predictions that the NYSE floor was in jeopardy.

A good example of this indifference came in late January, when the NYSE announced that it would expand electronic trading on the exchange floor. Despite speculation that these changes would take away business from NYSE floor brokers -- who are also seatholders -- not a single NYSE seat changed hands until a month later, on Feb. 25, when one sold for $1.5 million -- the same as in December. Seatholders were also sanguine when the Securities & Exchange Commission announced widely heralded market-structure reforms, and when the SEC announced on Mar. 30 a $242 million settlement with five specialist firms for alleged trading violations.

So the next time you read in the press that the NYSE floor is about to go the way of the Dodo bird, check to see if NYSE members are jettisoning their seats. The traders on the floor aren't fools.

By Gary Weiss

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