Right now, the Germans want it. In February, Deutsche Börse bid $9.5
billion for NYSE Euronext, only to be topped on April 1 by a combined
$11.3 billion bid by U.S. exchanges Nasdaq and ICE. And yet, twice
now, the NYSE has politely declined the higher offer, even calling it
a “strategic mistake.” That’s a curious position to take, especially
since a deal with Nasdaq would get rid of the only real competition
for share listing.
Investors, not surprisingly, voiced their anger with management at the
NYSE’s annual shareholder meeting yesterday, questioning its
preference for a bid that many believe undervalues the exchange.
But there’s a more basic question worth asking: Do we even need
exchanges anymore? It’s been said that a stock exchange can only be as
large as a voice can carry. On May 17, 1792, after years of shouting
out on the street, a group of 24 prominent brokers met under a
buttonwood tree at what is now 68 Wall Street and decided to move
indoors, so to speak. They created the New York Stock and Exchange
Board and vowed to “pledge ourselves to each other, that we will not
buy or sell from this day for any person whatsoever, any kind of
Public Stock, at least than one quarter of one percent Commission on
the Specie value and that we will give preference to each other in our
This is classic collusion that, wrapped and hidden in regulatory
language, pretty much exists to this day. But now technology has
rendered the stock exchange as we know it obsolete.
Don’t get me wrong. Stock trading is critical for capitalism. Stock
markets provide price discovery, liquidity and the only real mechanism
for capital allocation. When millions and billions of shares trade
every day, based on news and innuendo about the future earnings power
of corporations, a company’s true value is discovered. Not always
accurately, as markets are often missing information or have too much
noise, but enterprise values rise and fall and do the dirty work of
deciding who gets capital and who gets starved. Founders or early
investors may sell shares of their company, thus unlocking and
liquefying their risk capital to find more productive uses.
The 2008-09 financial crisis was caused by almost nonexistent price
discovery on mortgage-backed securities and derivatives that barely
traded, on exchanges or otherwise, causing way too much capital to be
allocated to home financing for too long. The scarcity of initial
public offerings these days means that the trading of a limited number
of private companies’ shares (Facebook, Twitter, etc.) is taking place
without the price discovery from the robust buying and selling of
shares that generally follows an IPO. Who knows what they’re worth?
So we need markets. But we barely need humans and traditional
exchanges anymore to implement these markets. And certainly not inside
a building, as voices now carry to the far reaches of the globe in 300
milliseconds, and even that’s considered too slow. Trading on Wall
Street is just plumbing these days. Value is added much further up the
food chain. Trades take place on servers in the great data cloud in
the sky. A third of trading even takes place in so-called Dark Pools,
privately owned servers that match institutional orders without ever
revealing the size or price of the order.
Nasdaq is further along in moving to automated trading than the NYSE.
Sen. Charles Schumer (D., N.Y.) is “concerned about how this
[Nasdaq-ICE] deal affects jobs in New York.” But of course it will
eliminate jobs in favor of automated trading. Now you know why the
NYSE says it’s a “strategic mistake.” Maybe for the NYSE, but not for
the rest of us.
But even a Nasdaq-NYSE super exchange is not the future. Stock
exchanges today are remnants of a regulatory regime that fought hard
to keep human markets fair while the owners of the exchanges got rich.
Stock exchanges make a killing—easy, risk-free profits. They charge
listing fees for the privilege of having shares trade on the
NYSE—though the assumption of quality for NYSE-listed stocks that have
included GM, Fannie Mae and Freddie Mac, Lehman, AIG and Enron is
Then there’s market data fees, a charge for your own and other’s trade
data sold back to you. Add to that technology fees for the right to
hook up to the exchange. It’s an amazing racket and makes up for
trading itself not making much money anymore (which is why Wall Street
firms took up creating and eventually owning derivatives).
Check out these numbers. In 2010, the NYSE received $422 million in
listing fees and another $373 million in market data fees, which just
about equaled their operating income for the year. But here’s the rub:
The NYSE doesn’t even trade half of NYSE-listed shares anymore. Five
years ago, they traded 70% of listed shares; today it’s 36% and
dropping, the difference made up by BATS Exchange, Direct Edge and
other alternative trading platforms, including Nasdaq.
Nasdaq’s numbers are similar. Market share of their listed stocks was
90%-plus in 1998 and is all of 27% today. No one’s quite sure what
they’re getting for those listing fees anymore, when so much of the
trading takes place elsewhere. But without them, there is no exchange,
no matter who owns it.
Today, speed is everything. High-frequency trading firms probe the
market with a flood of orders from fast computers sitting right next
to stock exchanges. Eventually, they will bypass exchanges and create
a virtual exchange with all the other trading platforms and match
Is this good or bad for Wall Street? The “Flash Crash” last May 6
seemed like automated trading run amok. Yes, but electronic markets
require a whole new set of rules, maybe even shining light on Dark
Pools. Commodity trading pits won’t be immune either. No matter who
ends up with the NYSE, the regulatory regime is in need of a serious
overhaul away from human-operated exchanges to cover a system of
In all my years working on Wall Street, I only went to the NYSE
once—to the visitors’ gallery where I gawked at traders through a
glass wall, much like an aquarium’s shark tank. Those sharks are
This post was cross posted on the Wall Street Journal. Andy Kessler is a former hedge fund manager turned author who now writes on technology and markets. Andy Kessler is a writer, author of many best selling technology business books, and regular contributor to the Wall Street Journal and SiliconANGLE.com.
His first book Wall Street Meat: Jack Grubman, Frank Quattrone, Mary Meeker, Henry Blodget and me was published in March of 2003, followed by Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score , published by HarperCollins in September of 2004. Running Money was added to the New York Times Business Bestseller list on November 7, 2004. Then came How We Got Here which you can find as a free PDF here.
July of 2006 saw the release of The End of Medicine , about Silicon Valley invading medicine and doing to doctors what ATMs did to tellers.
Andy is a frequent contributor to the Wall Street Journal op-ed page and has also written for The New York Times op-ed page, Wired, Forbes Magazine, The Weekly Standard, LA Times, The American Spectator magazine and techcentralstation.com and thestreet.com websites. He has even written a piece of fiction for Slate – bet you can’t find it.
Andy Kessler was co-founder and President of Velocity Capital Management, an investment firm based in Palo Alto, California, that provided funding for private and public technology and communications companies. Private investments included Real Networks, Inktomi, Alteon WebSystems, Centillium and Silicon Image.
In the early '80's, Andy spent 5 years at AT&T Bell Labs as a chip designer, programmer, and spender of millions in regulated last minute, use it or lose it budget funds. In 1985, he joined PaineWebber in New York, where he did research on the electronics and semiconductor industry and was an “All Star” analyst in the Institutional Investor poll.
In 1989, Andy joined Morgan Stanley as their semiconductor analyst, and following in the footsteps of Ben Rosen, he added the role of technology strategist and helped identify long-term, secular trends in technology.
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