Grasso's Not Greener on the Other Side, NYSE Boss Tells Members

Twice in the past six months, New York Stock Exchange Chairman Richard Grasso has backed away from bold pronouncements -- about the Big Board's possible initial public offering and its scheme to accommodate extended-hours trading -- after regulators and members advocated pausing to study the plans' far-reaching effects.

Such high-profile retreats might have cowed another exchange boss. But even as his patrons' caution has dictated that he take in his sails, Grasso has shrewdly managed to use the NYSE's vast wake to keep a seething pool of competitors at bay. Additionally, the feds -- in the form of the Securities and Exchange Commission and the Justice Department -- are hounding the markets to break down traditional barriers. Grasso, the guy who made his name tightening the Big Board's operational nuts and bolts, had to say something and get out in front.

Richard Grasso
NYSE boss taking a new role
Photo credit: AP

"I think he did it to raise the consciousness level, and he knew exactly the response he'd get," says Joe Grano, president of PaineWebber. "I don't think this is falling back on his sword."

In fact, Grasso may have been unsheathing it. Aggressively challenging the competition is a new trick for the exchange, which in the past has easily swatted away rivals. The chairman knows that though the Big Board's premier position in international finance remains unquestioned, the exchange will have to contend with both its longtime rival, the Nasdaq, and the guerrilla tactics of low-cost electronic communications networks in a vast free-for-all for crucial (and lucrative) order flow. As a result, the venerable NYSE must get down in the muck to wrestle for business that once upon a time wouldn't have dared go anywhere else.

"The New York Stock Exchange has to compete today to not be shut out somewhere down the line," says Ian Domowitz, a Penn State finance professor who has studied alternative trading systems. "Now they're in it with everyone else."

Everyone else includes rivals such as Archipelago, an ECN that has managed to enlist large, mainstream firms such as Goldman Sachs (GS), Merrill Lynch (MER), E*Trade (EGRP) and J.P. Morgan (JPM) into its fold. Those same firms also are developing strategies to internalize order flow, matching their own institutional traffic or taking the other side of major trades.

Among the greatest ironies is that Merrill Lynch, which volunteered to study the exchange's IPO possibilities, announced its alliance with Archipelago the same day the ECN said it was planning to trade NYSE-listed stocks. Archipelago and Datek's Island ECN have applied to be full-fledged exchanges. Island and an outfit called MarketXT have joined Reuters' (RTRSY) Instinet in the after-hours trading realm. This fight isn't shaping up as the NYSE's typical Tyson-Spinks cakewalk.

"The exchange is looking to push it to intimidate the ECNs and Nasdaq," says the NYSE pro of both the NYSE's IPO and extended trading plans. The competition, however, hasn't backed off.

"There has been a rapid evolution that has changed the landscape" for the exchange, says Robert Fagenson, who runs an NYSE trading firm. "We've gone through these things before; they're episodic." Fagenson says the competition posed by the ECNs is different because of the systems' efficiency. Still, he argues, whether any of them can develop the "faith and critical mass" of the NYSE has yet to be seen.

And he adds, "often people don't think of NYSE as a technologically advanced market. It is, in fact, the biggest ECN in the world already. It has made the biggest investment in technology" among stock markets -- about $2.5 billion. Much of that's due to Grasso's operational savvy, other insiders say.

Meantime, the exchange has had to lay the groundwork for the impending battle. Grasso has publicly said the exchange will explore buying an ECN and even listing Nasdaq stocks. He keeps symbols for marquee listings such as Microsoft (MSFT) -- no stock has traded under the symbol M in recent years -- in the holster, just in case.

Penn State's Domowitz goes as far as to liken such public pronouncements to "vaporware" in the network-technology business, where "moving quickly and decisively is generally a good idea" even if a product doesn't yet exist: "That way, you get everyone's expectations going in the right direction."

The right direction, if you're at the NYSE, could be the transformation of the exchange to a publicly traded, for-profit organization that would enable it to react to competitive pressures with less concern for seat holders' special interests.

The Thanksgiving IPO plan, however, stumbled in the wake of SEC concerns about regulation of the market and the outcome of an Internal Revenue Service decision about how the seat transfers would be taxed. It'll take at least the rest of the year to sort out those situations, so the champagne will have to wait.

Whatever the outcome, at this point Grasso's won high marks despite his need to retreat. "It's the role of leaders to shed some light. Grasso has courageously given some direction," says Jefferies CEO and Nasdaq board member Frank Baxter. "I give a lot of credit to [Nasdaq boss Frank Zarb] and Grasso. After enjoying a period of stasis from 1975 to 1997, they have been bold and forceful."

Grasso, an NYSE lifer, came to the job as highly regarded for his operational expertise and his internal connections -- roots so deep that they were almost detrimental. Now the consummate insider is being forced to show external leadership as the Big Board's pitchman.

"Richie's big concern is keeping market share," says one veteran NYSE floor broker. "Now, the Nasdaq is trying to list our stocks and we're trying to list Nasdaq stocks. It's all a big poker game."

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