Economy and Government and Technology

INVESTING Keenan Hauke: Changing times mean faster, more efficient markets

May 9, 2005

I grew up 12 miles from Manhattan. By walking a quartermile up the hill from my house and looking east, I could clearly see the entire skyline. At night, when the World Trade Center was all lit up, it felt close enough to reach with a small jump.

Lost in all the gleaming skyscrapers is an institution that is almost as old as our nation. And there are changes going on right now that spell the endgame for that institution as we know it.

The New York Stock Exchange began as a group of enterprising businessmen trading shares of companies on the street corner in downtown New York. This trading activity evolved into the most powerful exchange in the world. The existence of the NYSE has served as a driving force behind the victory of capitalism for more than 200 years.

But, things change. Until 30 years ago, anyone connected to trading could make vast sums of money because commissions were fixed by the government. In 1975, the SEC deregulated commissions. Charles Schwab and Muriel Siebert attacked the opening and built billion-dollar enterprises through discount commissions. As the discounting progressed, pressures on the NYSE to reduce trading costs grew.

A few years before deregulation, another major event took place that greatly altered the landscape. The National Association of Securities Dealers formed the NASDAQ in 1971 and began introducing the wider world to electronic trading. Twenty years later, NASDAQ was a force to be reckoned with as technology giants like Intel Corp. and Microsoft Corp. chose NASDAQ listings over the NYSE.

Technology improvements continued to bring down trading costs and increase speed. Trades done on the NYSE floor are done through specialists. This person is responsible for being a buyer and seller of last resort for a select group of equities. It was a good job until recently because the specialist was able to take a small piece of every trade going through him. These specialists are currently under investigation for doing something called front-running, which is using customer trade information for their own profit.

Like so many other things in our economy, the Internet offered a way to eliminate the middleman. NASDAQ has been trading without specialists for years. In the mid 1990s, two companies formed to serve as alternative exchanges to the NYSE and NASDAQ. These companies, Instinet and Archipelago, offered the ability to trade any listed security online. Volume shifted to these exchanges, which were fast and efficient.

Last week, the NYSE announced it was buying Archipelago for more than $3 billion. The days of the specialist are now numbered. The building where the NSYE is housed is on its way to becoming a museum.

Sometimes when I was in high school, my friends and I would play hooky and catch the train into the city. We would wander around downtown and check out the bull at the end of Broad Street and walk down Wall Street checking out all the rich stockbroker types. Today, kids can get the same experience without leaving their computers.



Hauke is a local money manager. His column appears weekly. Views expressed here are the writer's. Hauke can be reached at 566-2162 or at keenan@samexcapital.com.
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