ICE Deal for N.Y.S.E. Creates Global Powerhouse

Today the New York Stock Exchange building at Broad and Wall Streets in Lower Manhattan is not much more than a television studio. Soon it seems likely that it will not even be owned by a New York company.

The owner of the exchange, NYSE Euronext, agreed on Thursday to be acquired by IntercontinentalExchange, an Atlanta-based upstart that has prospered by trading derivatives over the Internet, for $8.2 billion in cash and stock.

The transformation of the New York Stock Exchange from its position at the apex of the world financial system to an asset to be bought and sold like any other — and one that is not deemed to be worth as much as it would be if it traded more modern derivative securities rather than old-fashioned stocks — has been going on for decades, but has accelerated in recent years.

Along the way the exchange lost its pre-eminent market position to newer competitors, gave up most of its regulatory responsibilities, and stopped being owned by the brokers who traded there.

An institution that began as an attempt to limit competition prospered most when it was able to exert monopoly control. Its power and authority withered as regulators and changing technology forced it to compete.

The exchange traces its history to the Buttonwood Agreement in 1792 — an agreement that was nothing more than an effort to fix the commissions that brokers charged their customers at a quarter of 1 percent, or $2.50 on a $1,000 bond. In the beginning, there was just one stock, the Bank of New York, and a handful of bonds that were traded.

The buttonwood tree — actually a sycamore — under which the agreement was signed lasted until 1865, long after the exchange moved indoors.

By the 20th century, the exchange had established its pre-eminent role. There were exchanges in other cities, but important companies were listed in, and traded in, New York.

The brokers who were “members” of the exchange agreed they would not trade any stock listed on the Big Board anywhere except on that exchange. In practice, that meant there was no competition. If you wanted to buy or sell shares in ATT or General Motors, the trade would take place at 18 Broad Street, in the 1903 edifice designed by George B. Post. The huge sculptures on the pediment were titled “Integrity Protecting the Works of Man.”

Commissions were fixed, just as they had been in 1792.

The exchange was virtually unregulated until the 1930s, and for decades after that it was a “self-regulatory” organization that monitored and supervised its own trading under the sometimes cursory supervision of the Securities and Exchange Commission. The Big Board cultivated a high-class image, in which only the best companies were allowed listings. The reality did not always match the image, but a N.Y.S.E. listing became a symbol of quality that reassured investors around the world.

The monopoly began to break down in the 1960s, as brokers who were not members of the exchange found ways to use computers to trade shares listed on the exchange for less than the Big Board charged. A pioneer in that business was Bernard L. Madoff, who would go on to infamy many years later as the creator of the largest Ponzi scheme in history.

Then the government banned fixed commissions, and the exchange was forced to allow its members to trade N.Y.S.E.-listed securities anywhere. It lost market share, but remained the dominant marketplace, the one that set the price of any security it traded. If the N.Y.S.E. halted trading in a stock, so did every other exchange. Without price discovery within the walls of 18 Broad Street, no one could be sure what market prices were.

But the financial world was changing, and the Big Board was not keeping up. Options on stocks began trading in the early 1970s. The Big Board could have dominated that market, but instead it sniffed at it and the market became centered in Chicago, where commodity exchanges had long existed, trading wheat and corn contracts. As financial futures were created, on things like currency values and interest rates, they too were traded in Chicago.

Within the world of stocks, more and more exchanges moved to computers. The N.Y.S.E. moved as well, but it tried to maintain the dominance of its members, particularly the specialists who were required to always be ready to buy or sell any stock listed on the exchange. It found it hard to keep up with competitors in speed or cost. Competitors did not have to finance their own regulatory apparatus, and the Big Board decided to follow, merging N.Y.S.E. Regulation into Nasdaq’s operation to create Finra, the Financial Industry Regulatory Authority. The Big Board became less distinctive.

In 2006, the exchange stopped being owned by its members and went public. It acquired exchanges in Europe and renamed itself NYSE Euronext. It acquired a computerized market.

Article source: http://www.nytimes.com/2012/12/21/business/global/ice-deal-for-nyse-creates-global-powerhouse.html?partner=rss&emc=rss