Scaling down the Big Board
( 2003-11-07 09:23) (Economist.com)
Governance of the New York
Stock Exchange is to change dramatically under plans unveiled by its interim
boss, John Reed. But his proposal that the exchange keep its regulatory role
will disappoint many.
John Reed, the interim chairman and chief executive of the New York Stock
Exchange (NYSE), published his proposals for a revamp of the exchange¡¯s
governance on Wednesday November 5th. He hopes that the changes will rebuild
confidence in the Big Board, which took a battering when his predecessor, Dick
Grasso, was ousted after an outcry over his $187.5m pay package. Mr Reed is
proposing to ensure that the exchange¡¯s controversial regulatory functions are
independent of the securities firms that trade on the exchange and the companies
that list on it, while remaining under the exchange¡¯s roof. But critics feel
that the exchange has done such a poor job of regulating itself that the
Securities and Exchange Commission (SEC), the main markets regulator, should get
someone else to do the job.
Mr Reed is proposing that the day-to-day operations of the exchange be
separated from its governance and from the regulation of trading. For starters,
the exchange¡¯s 27-member board¡ªstuffed, to date, with top officials from the
securities firms and companies regulated by the NYSE¡ªis to be slimmed down to
one with no more than 12 directors, none of whom would be from the securities
industry or a company listed on the exchange. Securities-industry executives
would instead serve on various advisory committees. All regulation would be the
responsibility of the board¡¯s independent directors.
The NYSE's troubles burst into the open late this summer, when details of Mr
Grasso¡¯s remarkable compensation deal were first disclosed. Since then, critics,
including William Donaldson, the SEC¡¯s chairman, have asked whether Mr Grasso¡¯s
pay may have diverted resources from the exchange¡¯s all-important regulatory
function. Such suspicions appear to have been given substance by an
as-yet-unpublished SEC report into trading violations by the specialist firms
that trade on the exchange. (The NYSE is the last big exchange to trade by ¡°open
outcry¡± rather than electronically.) According to the Wall Street Journal, the
SEC probe found that improper trading in around 2.2 billion shares cost
investors more than $150m. Even more worryingly, the report said, ¡°the NYSE's
disciplinary programme¡does not adequately discipline or deter violative
conduct.¡±
These findings are so damning that they may be enough to sway Mr Donaldson.
He told Congress in September that self-regulation had ¡°worked pretty well¡± at
the exchange, but he may have to revisit that opinion. The SEC has already been
made to look flat-footed in its regulation of Wall Street investment banks and
fund managers by the zealous campaigns of Eliot Sptizer, the New York
attorney-general. When it comes to the NYSE, it may choose to be more proactive.
Already, the SEC's response to Mr Reed's proposals suggests that it may have
something more dramatic in mind. The commission described them as a step in the
right direction, but added that it would continue to look at ¡°further
market-wide reforms¡±. In addition to the SEC's approval, Mr Reed must secure the
backing of the exchange's 1,300-plus members in a vote on November 18th. The
signs are that they will recognise that Mr Reed's changes are the least they can
expect.
After all, if the SEC report into regulatory failings at the exchange is
published, or more details are leaked, it may cause other users of the exchange
to demand radical reform of the exchange's operation, as well as governance. Mr
Reed wants representatives from big investing institutions, such as mutual-fund
managers and pension funds, to get more involved in the governance of the
exchange. But they may decide that the exchange is still too close to the
interests of Wall Street, rather than the Main Street investors they are
supposed to represent. Fidelity, a giant fund manager, has already called for an
end to the specialist system of trading. The specialists might soon find that
their cosy, centuries-old trading system is an idea whose time has
gone.
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