What happened the first time the NYSE was completely disrupted
Peter Kenny is currently Chief Market Strategist for Clearpool Group and was formerly Managing Director and Chief Market Strategist for Knight Capital Group. This article originally appeared on his excellent blog. You can follow Peter on Tumblr and Twitter.
Back in 1975 I was 16 years old and the eighth child of twelve. I was raised in an Irish family, in the suburbs of NYC, bound by tradition. The rubrics and mores of tradition spanned from order in family life and faith to a deep multigenerational appreciation for Wall Street. My mother’s father, my father, my uncles - most all of my male relatives had been making a living on Wall Street in both the U.S. Treasury market and at the NYSE spanning back to the roaring twenties.
On May 1st that year my father came home from work as a NYSE member, sat down at the dinner table with his twelve children and my mother and asked for silence. He went on to make an announcement. “Children, the business as I have known it is over. The way Dad gets paid has changed. I am not sure there is much of a future left down there on Wall Street for me and I am certain there is no future for you.” The clock had started ticking on what would eventually lead to the unraveling of a system long revered and equally reviled. That system or code of standard was referred to as the fixed-rate commission schedule.
For decades leading up to May of that year, commissions paid to stock brokers had not changed, were codified, fixed, non-negotiable and very lucrative for members of the revered New York Stock exchange. So lucrative in fact that the fixed commissions were actually negatively impacting both performance and the volume metrics of U.S. equity markets. Though the shift away from fixed-rates was a slow one. It was necessary as it was sponsored by Wall Street’s institutional clients. To say that it was disruptive to the status quo would be an understatement. It actually wasn’t until 1987 that I saw the last fixed-rate commission fee schedule on the trading floor in a member’s hands - as some institutions were slow to make the shift. That NYSE member’s hands were mine.
NYSE memberships, known as seats, traded dramatically lower on the Big Board within a short two years as a result of the fact that nearly everyone thought that this shift away from fixed rates would have a negative impact on the value of owning seats necessary for belonging to the exchange. There was in fact a point in the early seventies when a seat on the world’s most prestigious exchange and home to roughly 90% of all U.S. equity trading volume was worth little more than $30,000 - less than a NYC cab medallion at the time. The nearly 1,100 seat owners, including my parents, were convinced that the end had come.
To make matters worse, in 1972 – 73, the U.S. economy was valiantly attempting to climb out of a recession, President Nixon had taken the U.S. dollar off the gold standard and we as a nation were facing gas rationing for the first time in our history at the hands of OPEC. While closer to 11 Wall Street the NYSE was confronting a startup competing exchange known as the NASDAQ which had been launched in 1971. Morale at the corner of Wall and Broad Streets was at an all-time low.
Though trading volumes on the NYSE did manage to slowly increase in the years immediately following the initial shift away from fixed-rates, there was no end to the challenges faced by the NYSE. A few short years later in 1978, the SEC launched another competing market place known as the Inter-Market-Trading System (ITS) in order to provide regional markets the ability to compete with the NYSE more effectively. The value of NYSE seats, as a result of the shift from fixed-rate commissions, a struggling economy, emerging competing markets and renewed regulatory oversight of U.S. equity market structure, remained historically undervalued given that in the late 1920’s those very seats traded as high as $680,000.
Change brings with it opportunity.
Ultimately the NYSE survived as a member owned institution by adapting to its clients’ needs until March 8, 2006 when it became a public company under the symbol NYSE. Within several years the NYSE was bought out by Atlanta based Intercontinental Exchange (ICE). From May Day in 1975 to 2006 NYSE seats traded from a low 30 thousand dollars to a record 4 million dollars in 2005. Volume exploded from 10 million shares a day to over 3 billion shares a day.
Dad was wrong this once. There was a future. A brilliant future.
The future was and remains in the hands of those that adapt.
