For Whom the Bell Tolls: Tradition Is the NYSE's Strength (Hear That, Nasdaq?)

Big Board Chairman Richard Grasso does see possible competition on the horizon -- but it's not from whom you would expect.
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When New York Stock Exchange Chairman Richard Grasso was asked earlier this month to compare the Big Board's fortunes this year with those of the competing Nasdaq, he tried his best to avoid coloring his response with a hint of conceit.

"The reality is we're on the same team," he said. "We're on Team America."

But Grasso couldn't help himself. He also said that of the roughly 10,000 companies whose stocks trade on the various Nasdaq exchanges, only about 700 would meet the minimum NYSE listing standards.

"I'm only interested in 700," he said with a slightly smug smile. "I'm perfectly happy to yield 93% of that."

Comfortable words from a man who just a year earlier was planning to take the venerable NYSE public to raise money to fight off threats from Nasdaq and upstart electronic trading networks, or ECNs. The Big Board's trading floor where people, not machines, actually traded stocks was considered a dinosaur.

Times Change

Now, it not only continues to operate its traditional floor operations, but also just completed a $60 million new trading floor, adding 15% to its floor trading space and casting a vote of confidence for the human interaction of the call-out auction process. Plans also are moving forward for construction of an entirely new

headquarters.

And when Grasso rattled off a list of organizations that would make the NYSE take dramatic action if they emerged as competitors in five years or so, he didn't mention a traditional exchange like Nasdaq. Instead, he named

Microsoft

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,

eBay

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and

Amazon.com

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-- four tech giants that are all listed on Nasdaq but aren't in the securities trading business now.

"This business is primarily an information business," Grasso said. "If suddenly there are new names in that space that are publicly owned, that have scrip to raise capital, that have scrip to acquire other businesses, it's clear that our structure would need to change. That doesn't appear to be the case in the near term." The Nasdaq, by contrast, did go forward with a restructuring earlier this year, completing a transfer of 40% of the exchange into private ownership. It is now proceeding with a second phase of the privatization. Nasdaq Senior Vice President Andrew MacMillan said that should give the exchange a leg up on its rival, the NYSE. "This is not a market to be so comfortable in," MacMillan said.

Still, the NYSE is making some changes. It's preparing a new foray into the world of electronic trading early next year, providing automatic electronic execution of some trades and making real-time stock quotes available online.

Once Upon a Time the Nasdaq Was Important

But none of its changes seem so pressing anymore.

Just nine months ago, the Nasdaq was in the midst of a tech-stock explosion, issuing reports of new trading volume records almost daily. Initial public offerings were the rage and most, by a wide margin, took place on Nasdaq. By the end of October, there were 371 IPOs on Nasdaq. On the NYSE by December, there were 24 IPOs, although it added a total of 118 companies to its list.

Meanwhile, ECNs were much discussed and trading was growing on them.

Then came the market's fall. The Nasdaq Composite is down 42.5% for the year. It's off 53.6% from its high of 5048 on March 10. The

Dow Jones Industrial Average

, which consists mostly of NYSE-traded stocks, is also down significantly, but by 8.8% for the year and by 10.5% from its high of 11,722 on Jan. 14.

"Part of the New York Stock Exchange's blessing is they do have stronger, more-established companies," says Junius Peake, a professor of finance at the

University of Northern Colorado

and a former vice chairman of the

National Association of Securities Dealers

, which runs the Nasdaq.

Bigger

The Nasdaq national market has 4,761 listed companies with a combined market capitalization of $4.1 trillion as of this month. The NYSE has 2,879 listed companies with a market capitalization of $17.6 trillion -- more than four times Nasdaq's total. Peake says the NYSE has now attained the status of the safe bet, similar to what was at one time called the "

IBM

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Syndrome." That thinking held that IBM equipment had a reputation as being so reliable, a decision to buy it was virtually beyond reproach.

Meanwhile, the Nasdaq has a host of problems. While news at the beginning of the year often focused on IPOs with spectacular first-day runs on Nasdaq, recently it has dealt with the growing numbers of firms that are

being delisted because their share prices no longer are above the $1 minimum listing threshold.

Then there was a preliminary report from

Securities and Exchange Commission

Chairman

Arthur Levitt

earlier this year that concluded that 85% of trades on Nasdaq aren't made at the best price. The SEC is in the final stages of completing that report.

Nasdaq suffered an embarrassment related to its own technical capabilities when it wasn't able to shift to trading in decimals as early as expected. The NYSE began a

pilot program.

Even More Problems

And more than a year ago, the Nasdaq introduced a new system for trading that it says is intended to help investors by providing the three best prices available for a security, rather than just one, as is now done. But the system, called

Supermontage

has faced heavy opposition, first from ECNs, and later from some institutional investors, who have questioned whether the system will help investors, or brokers, more. Nasdaq has amended the Supermontage proposal eight times since it introduced the concept on Oct. 1, 1999, but it still awaits approval by the SEC. Nasdaq's MacMillan said the troubles of the year shouldn't overshadow significant accomplishments for the exchange, including its completion of a $37 million market site in Times Square, and its moves into markets in Japan and Canada. "Which exchange is actually taking concrete steps to implement globalization?" he said. "It's been a major year for us, in a number of respects." MacMillan added that Nasdaq's privatization puts it in a more flexible position to react to future market changes.

For now at the Big Board, the floor auction process persists. Grasso says plans for taking the NYSE public are firmly on hold. "Right now there's no need as we see it," he said.

And in a tacit testimonial to the enduring cache of the NYSE's physical trading floor, NASD Chairman Frank Zarb recently lamented the ubiquity of the Big Board's bell as a symbol for the open and close of trading in U.S. markets on financial news broadcasts each day.