As for the third- and fourth-largest American stock exchanges, few people outside the industry have even heard of them, probably because they are both completely automated and became exchanges less than two years ago. One is based in New Jersey and called Direct Edge (“America’s newest stock exchange”), and one is based in Kansas City and called BATS. While each respectively has a 10 percent share in the U.S. equities market—and they will probably continue to grow—it’s unlikely their computer warehouses will ever be the backdrop for CNBC.
When asked if Direct Edge might ever get its own bell, one equities analyst just laughed. “Maybe a virtual bell, or some kind of high-frequency bell?” he said, giggling.
To understand what happened to the NYSE we all learned about in high school, one must go back in the very distant past, all the way to 2005. Before then, for the previous 213 years, the NYSE was a member-run institution, essentially a private club whose members paid dues for the right to broker trades on the exchange.
Like a utility, it enjoyed status as a practical monopoly. As recently as 2004, some 80 percent of NYSE-listed stocks were traded on the exchange itself. That’s the NYSE that Mr. Schumer is trying to “protect.” But in 2005, after some high-profile proprietary-trading scandals, and a growing realization that concentrating all trading in one place was not the most efficient way to do things anymore, the S.E.C. ended the NYSE’s dominance.
“These guys were basically running it to make money themselves at the expense of the overall exchange,” said Charles Jones, a professor of finance at Columbia Business School. “They were doing their job as they had done it for the past 30 years—for the past 200 years, really.”
When the NYSE suddenly faced competition, its very reason for existence was quickly imperiled. Unlike the NYSE, which had thousands of employees left over from its legacy days, the new guys—like BATS and Direct Edge—just needed to set up some computers; with very low overhead, it could quickly undercut the incumbents. “They’re just like a little mushroom that shot up one night after a rainstorm,” said Mr. Jones.
In the years that followed, the NYSE-listed stocks actually trading on the exchange itself has more than halved. For the NYSE floor traders, still trapped in the cradle of capitalism, the past five years have been grim, as lost market share was accompanied by a race to the bottom in the fees traders charge—and diminished need for humans in what increasingly became a technology business.
“As far as how we do our jobs, the market has become a lot more fragmented,” said James Matthews, a broker with the Perdiue Group who has worked on the floor of the NYSE for 20 years. “There have been a lot of layoffs down here, because the margins are so thin now.”
The merger will do little to ease their predicament. Under the new combined company (as yet unnamed), the largest chunk of revenue, an estimated 37 percent, will come from trading and clearing derivatives, particularly European futures.
So what is it that we’re watching on CNBC these days? It’s basically an advertisement-a way for companies going public to debut themselves to millions of investors watching daytime television. The NYSE still has a thriving listing business. As Michael Wong, an equity analyst at Morningstar, put it, “To an extent, just having that floor open, that’s however many free million dollars in free advertising every year.”
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