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New NYSE CEO Hints About Changes

Goldman Sachs' President John Thain says electronic trading may play larger role.

Updated from 8:42 a.m.

Despite John Thain's hints about altering the structure of the

New York Stock Exchange

when he takes over as chief executive, some observers say a major overhaul isn't in the cards.

In a morning news conference announcing his appointment, Thain, who is the president of

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report

, said electronic trading could play a larger role in the Big Board's future.

"My job is to make sure the exchange remains the most liquid, most efficient marketplace in the world," he said. "That may involve a greater degree of electronic trading, but that remains to be seen. We'll see in the next couple of months what the best structure is for the exchange going forward."

The NYSE and the specialist firms that operate there as part of the current floor trading system have been under fire recently, and both were sued Wednesday by the California Public Employees Retirement System for allegedly violating a host of trading rules. The NYSE itself is in the process of fining the firms for alleged violations.

Specialists are responsible for making an orderly market in the thousands of stocks traded on the exchange through an "open outcry" auction system that sometimes requires them to buy and sell shares for their own account. Critics say the system is too slow compared to electronic trading and is susceptible to manipulation because floor brokers have an entrenched advantage.

While pressure to reform the system has been building, skeptics say John Thain isn't the man to shake things up.

"It's interesting that Goldman Sachs also owns a big specialist firm," said Junius Peake, professor of financse at Kenneth W. Montfort College of Business. "That raises a bit of a red flag for me."

Goldman Sachs acquired Spear Leeds & Kellogg Specialists in 2000. Any changes that would limit the role of specialists, or get rid of them completely, could possibly hurt Goldman and send the share price lower. At the start of the year, Thain owned 3.1 million shares of Goldman, which amounts to about $300 million today. "Will he still have an interest in Goldman Sachs? If he does, I don't think it's as independent as it ought to be," Peake said.

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Last month, Thain said he sees a need for specialists on the floor but doesn't think they need to handle the volume of trades they currently do. Specialists should spend more time dealing with difficult trades, he suggested.

Peake said the fact that NYSE seat prices have remained stable recently suggests that real reform is unlikely.

"You'd have thought that given the lawsuit by Calpers against specialists and the NYSE, that the seat prices would have come down," he said. "The fact they didn't tells me that ... maybe it will be business at usual."

A regular seat on the NYSE sold for $1.5 million Thursday, which is unchanged from a month ago. Before the Grasso scandal erupted, the price stood at $2 million.

New York state Comptroller Alan Hevesi on Thursday urged Thain to consider reforms proposed by the National Coalition for Corporate Reform that were not adopted in the Reed plan. "In particular, we still believe that the NYSE main board should have public investor representation and that regulation should be meaningfully strengthened by being separated from operations," he said.

Many critics say interim Chairman John Reed's plan to fix corporate governance problems at the NYSE doesn't go far enough. Reed unveiled a plan last month to reduce the board of directors to eight and named former corporate executives and Wall Street insiders to fill it, a response to criticism over the previous board's approval of Richard Grasso's $139.5 million pay package, when he was chairman.

At that time, Hevesi said he favored at least two boards: one to oversee the NYSE's regulatory division, and another to decide compensation issues and market-related matters. On Wednesday, The NYSE decided to separate the chairman and chief executive posts. The SEC approved that decision and endorsed Reed's plan to create a smaller board.

Securities and Exchange Commission

Chairman William Donaldson said Thain "brings a distinguished record of leadership and knowledge to this important new role." Donaldson said he is looking forward to working with Thain as the NYSE "moves to address the many ongoing and important challenges that lie ahead."

Thain will make $4 million a year at the NYSE, which is far less than his predecessor, Grasso, but still a considerable sum for the head of a self-regulating body and quasi-public institution.

"I think we have an exceptional person at a time when frankly we require it," Reed said.

Some observers are concerned that Thain will not bring an outsider's perspective to the Big Board. Thain, a 48-year-old Massachusetts Institute of Technology graduate who has been instrumental in modernizing Goldman's in-house trading platforms, recently won a hard-fought power struggle with Goldman's John Thornton, who had shared the No. 2 position.

Still, Reed said the exchange had no choice but to choose a Wall Street executive for the post.

"The idea of having a CEO of the exchange who knows nothing about what goes on the floor of the exchange was simply a nonstarter," Reed said. "You must understand trading, you must understand finance, and for us to bring some greatly talented executive from the aerospace industry ... doesn't make any sense."

Reed made joking reference to Goldman CEO Henry Paulson's "ungenerous" opinion of Thain's appointment. "He feels that I have stolen a person who had a very important role there," Reed said. "But Goldman will probably benefit a lot if the New York Stock Exchange does well."