#DigitalSkeptic: NYSE Was Just Another Digital Business
NEW YORK (TheStreet) -- Duncan Niederauer may be schmoozing with the global financial elite at the World Economic Forum in Davos, Switzerland. But what the man really wants to talk about these days is what it takes to survive the digital economy.
"I will be in the job for one year as the head of the NYSE and the president at ICE," said the former chief executive of NYSE Euronext, who last year sold the New York Stock Exchange to Atlanta-based IntercontinentalExchange Group. "I would like just one of you journalists to write an article that says it's a positive thing to have kept the NYSE alive and thriving with only 700 people instead of the 5,000 that we used to have."
When Niederauer first laid down his "less is more" argument as part of an invitation-only event hosted by the Society of American Business Editors and Writers (of which I am a board member), my first reaction was as you might expect: Here's yet another digital-age CEO justifying his eight-figure salary by making sure it's the little guy who gets restructured, not him.But, wouldn't you know it, when I actually peeked underneath the NYSE's hood and studied how the Big Board restructured itself from the bloated Richard Grasso $140 million golden parachute era, I realized Niederauer had a point. This Long Island kid who went on to become a partner at Goldman Sachs had effectively adapted his legacy exchange for the declining Digital Age. And how he did it is worth a serious look for anybody running or investing in any sort of digital information company, be it in music, publishing, moviemaking or even corporate information systems. "I don't care how good you think the brand is, it is a technology business," he said. "If we still had 5,000 people on the trading floor and we were knee deep in paper, we would be dead."
What's fascinating about the New York Stock Exchange of 2014 as compared with that of 2004 is not how different it is but how this "difference-ness" was manufactured internally. Niederauer's big insight was not to rely on outsiders such as startups, new entrants or acquisitions. Instead, he bet early that the only way the NYSE could stay relevant in a world dominated by automated market makers like Direct Edge was to update the core approach -- to have a human floor specialist armed with enough digital tools to add value in the race-to-the-bottom information economy. These so-called Designated Market Makers were plopped into the middle of trading to "operate both manually and electronically to facilitate price discovery during market openings, closings and during periods of substantial trading imbalances or instability" -- as the exchange describes it. The trick was getting the stuffy New York Stock Exchange to actually change. The first steps date all the way back to 2007, when the operation went into a sort of hybrid mode in which it opened its trading models to specialists and began supporting e-trading and online price discovery. By 2008, floor specialists were turned into Designated Market Makers, which put pressure on for more layoffs. Then Niederauer went wild in the high-tech armory: Market Makers were given handheld trading tools that offered deeper access to financial modeling technology. From 2009 through 2013, the exchange introduced significant efficiency upgrades in its trading technology as it tried to stay competitive with global exchanges that were slashing costs. Niederauer sold the Big Board on the most important Digital Age survival tactic: doing more with less. In 2008, net margins ran in the negative 15 percent range as investments such as a $500 million data center made the hit of the financial collapse that much worse. Margins returned to the black by 2009 and peaked at about 15% in 2010. But just like other Information Age companies from Google to LinkedIn, net margins have dropped steadily as the costs to maintain new digital services eats deeper into revenues.
What's sobering for investors is that, even after all these years, Niederauer is unsure about the structure -- and future -- of trading markets. "I am embarrassed to admit I would never have predicted exchanges would have proliferated to the point that they are today," he told me. "There is no explanation for why even in a place like the options world we need 11 option exchanges." "The fragmentation of the data is not a business problem for us, it's a regulatory problem." The real challenge, he said, is staying optimistic as you restructure. "I think the world is doing better than we want to allow ourselves to believe," he said. "I'm an optimist," he said. "That's the only way you can make progress in this kind of market."
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