Belted With a Bigger Board

Over the years, an expanding NYSE has often preceded a correction.
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You probably never noticed this, but expansion plans at the New York Stock Exchange have often been executed just prior to a collapse in the stock market. Now, with the Big Board's animal spirits in full cry, could the phenomenon be upon us again?

A review of exchange data and discussions with various historians, traders and other market lifers shows that the Big Board has chosen to expand in size, scope or services during the following years: 1929, 1966, 1974, 1985, 1997 and 2000. Not exactly an auspicious record.

"I used to tell people at cocktail parties, 'The next time you see the NYSE expand, physically run, do not walk, to the nearest broker that you know, and sell everything that you own,' " says Mike Epstein, who spent over 30 years at the NYSE, including as a member and floor broker, and who is now a visiting scholar at MIT. "When things are crazy bullish, that's when they expand -- they have to make that commitment because things are never going to get worse.

"It usually does."

What explains it? Chance, say some. Look at enough market indicators and you will believe anything. Others, however, discern a more meaningful connection. When the NYSE expands, it's because the investing public has become more enthusiastic. Anytime that happens, they say, it's time to book your profits.

"Finance, like anything else, is subject to fashion. So, people tend to act when things are fashionable," says Eric Weiner, author of "What Goes Up: The Uncensored History of Modern Wall Street." "The NYSE is forced to change when people push them into it. These changes have all happened at times when people pay attention to the market. And more people pay attention when it is a market top."

This is particularly true when retail investors get active, Weiner says. When you start hearing barbers or taxi drivers or tennis pros giving stock tips, he says, you know it is time to get out.

"When novices come in, you get a lot of excitement," Weiner says. "They are piling into the hot stock ideas, and it is what happened in 1987 and in 2000."

The correlation between NYSE expansion initiatives and market collapses dates back to the year of the Great Crash. In 1929, the exchange built a new trading venue and issued half-seat dividends to owners, enabling the NYSE to expand while giving the insiders a chance to cash out.

"All kinds of new people were coming into the equity market in the late 1920s," says Richard Sylla, an economic and financial historian at NYU's Stern School of Business. "With all the high trading in the late '20s, the seat prices were quite high. The stock exchange used the prosperity of the late 1920s to expand."

At the same time, the half-seat dividend allowed some famous Depression Era investors to take home a large payday. "Owners, such as John D. Rockefeller and J.P. Morgan, sold out at the peak," Sylla says. Fast-forward 77 years, and you find former seatholders and other Wall Street players using this month's secondary to unload $1.5 billion worth of stock inherited when the exchange went public. A troubling parallel?

"It's almost exactly the same," Sylla said.

More bad timing happened in 1966. When the

Dow

went above 1000 for the first time, exchange operators inaugurated a system in which the transmission of trade data became fully automated. Shortly after, the market fell below the 1000 benchmark, where it stayed for 15 years. During that bear market, the Dow took two distinct hits: in 1970, shortly after the company opened a new trading site called the blue room, and in 1974, about the same time the NYSE extended its trading hours.

In 1997, the NYSE began trading stocks in increments of sixteenths. Later that year, the Dow had its largest single-day dollar loss in history. In 2000, the NYSE opened a new trading facility on Broad Street -- just in time for the tech bubble to burst.

What about now? The pattern could be ominous considering the NYSE's acquisition spree over the past two months. In March, the NYSE went electronic when it merged with the Archipelago trading platform. And just a week-and-a-half ago, the securities exchange offered $10.2 billion for Euronext, the European exchange.

"If you want to think about the changes at the stock exchange, let's start with the present," NYU's Sylla says. "There is globalization, and people now invest all over the world. I think the NYSE has to be all over the world."

The overseas overtures have not occurred during a period of market calm. Since touching 11,642 on May 4, the Dow is down 493 points, or 4.2%. Over the same period, the

S&P 500

has dropped 4.4% and the

Nasdaq

has dropped almost 7%.

As statisticians say, correlation does not imply causality. "There are only two emotions on Wall Street: fear and greed," says John Steele Gordon, a Wall Street historian. "Slowdowns are caused by natural forces, so I think that you may find that this is more coincidence."

Still, with May going into the books as one of the worst months for stocks in three years, don't you wish you'd spoken to Mike Epstein at a cocktail party back in April?

"When is everyone a buyer, when does that happen?" asks Epstein. "Not at the bottom, darling. At the top."