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Wall Street's Relocation Worries Return

George Mannes

Up until Tuesday, the idea of moving Wall Street out of New York seemed as nonsensical as relocating Hollywood to Nebraska.

Sure, there have always been advantages to moving out of whatever big city in which an industry might be concentrated. But those are usually outweighed by the need for and convenience of working in close proximity to related businesses.

In the aftermath of the World Trade Center disaster, however, many survivors in the financial industry are likely to re-evaluate the systems and traditions that concentrate them in Lower Manhattan. And that, in turn, could revive previously rejected ideas for greater decentralization of the U.S. financial markets --turning the New York Stock Exchange's trading floor into a historical artifact.

The NYSE, of course, is at the heart of why people who work on the metaphoric Wall Street want to be located near the asphalt one. Unlike other exchanges, the Nasdaq among them, the NYSE is what's called an "open outcry" market, one in which all orders to buy or sell a particular stock are funneled through a single location. At the NYSE, that translates into a person or persons on the trading floor at the corner of Wall and Broad.

Some related personnel also have to work in the neighborhood. But over the past century, as more trading processes became computerized and fewer people were needed to transport order slips and stock certificates from building to building, many firms have moved offices to more attractive and/or cheaper real estate in New York City and beyond.

Yet the face-to-face nature of the NYSE remains. That was problematic for several reasons -- some completely unrelated to physical security -- before this week's events, says Junius Peake, a finance professor at the University of Northern Colorado and a consultant on building financial markets.

The bloodshed Tuesday, of course, put a spotlight on the challenge of security. The potential threat is no secret to the NYSE, which is well aware that as a symbol of American capitalism, it is a tempting target to terrorists of all political persuasions and agendas. Though the biggest disruptions that exchange members usually have to deal with are busloads of tourists crowding the neighborhood on summer days, it's an understatement to say that security precautions around the exchange have been exhaustive for years.

One of the things that the World Trade Center disaster indicates is "a structural defect in our financial markets," says Peake, who worked on Wall Street for four decades and is a former vice chairman of the National Association of Securities Dealers. That defect is putting such a concentration of physical market facilities, he says, in so small a geographic area. "Given today's capabilities -- technologically -- it's something we shouldn't do as a country," Peake says.

So what's the alternative? After all, the essence of the exchange -- all orders for a particular security executed by a single specialist -- would seem to require people gathering in some central physical location. No, says Peake, who more than 20 years ago was one of the proponents of a computer-based system requiring no central brick-and-mortar facility.

What Peake proposed in the 1970s and continues to argue for today is a system combining decentralized market facilities with a centralized order flow. On a system of computers and people scattered across the country -- a system employing redundant equipment and mirror-imaged information -- people anywhere could enter orders to buy or sell a particular security. All of the orders for a particular security would go to a single queue. And each of the electronic queues could wind up at a different physical location.

Such a system would be cheaper to operate than the market-floor system, says Peake, who gives a ballpark estimate that it could be set up for less than $1 billion -- half the amount, he says, the NYSE has spent on capital improvements over the past 10 years. The system would be easier to regulate, as all orders for a security, whether or not canceled, would lead to a centralized electronic trail.

The system would be safer, too, he says.

Similar systems are in place, Peake says, in France, Belgium and Toronto. But specialists who are members of the exchange -- at a time when security wasn't the primary issue it has suddenly become, emphasizes Peake -- have resisted proposals like his, partly because of the advantages they enjoy from the current system. "If bank tellers had run banks, how many ATM machines would we have?" Peake asks.

Despite the decentralization that could be possible, though, an important force is at work in keeping companies in the New York metropolitan area. It's the same force that's behind the continued importance of the entertainment industry in Los Angeles and the semiconductor industry in Silicon Valley, says Rohit Shukla, CEO of the Los Angeles Regional Technology Alliance, a nonprofit think tank and business assistance organization in southern California.

That's the economic value of having all the people and components of an industry in a specific geographic area, readily at hand, says Shukla. Though people may argue that today's electronic communications diminish the value of such concentration, Shukla says you have to look beyond communication to other advantages of concentration that technology can't help: mainly a ready supply of people for forming new businesses and expanding old ones -- people with relevant talent, experience and instinct.

"It's very difficult to make the case that the financial services industry in New York is just going to fold and be shipped somewhere else," says Shukla, "or even a big piece of it." It's like snipping away part of a spider's web and expecting the rest of the intricate structure to hold up, he says: "It's just not going to happen."

So New York will remain the financial capital of the world. But at the very least, people will be pondering the current system. "This is a defining moment in the financial history of the United States," says Peake.

And the week's events will be cause for pondering the markets' presence in New York. Peake points out that the city of New York has agreed to subsidize a new, larger trading floor for the NYSE. "I just wonder in the light of what happened," he says, "whether the city and the New York Stock Exchange are going to rethink that."