Duncan: NYSE Trading Floor is a Differentiating 'Lever' in Volatile Markets

By: Ray Pellecchia

File Under: NYSE

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I recently posted some news reports that came out of our CEO Duncan Niederauer's appearance at the Reuters Summit last month, but the part about NYSE trading was rather limited.

Almost a month later, my RSS reader turned up a transcript of the entire conversation. Again, it's mostly about NYSE Euronext as a company and our initiatives across multiple products and geographies, and I recommend it as such for anyone interested in that broad view. The transcript also includes all of the discussion about trading on NYSE and the trading floor, and I replay that excerpt below for anyone interested in the full context and flavor of what was reported earlier.

Two caveats: one, the conversation dates back to May 5; and two, the transcript appears to be unedited, and I have corrected a couple of words transcribed incorrectly.

UNIDENTIFIED PARTICIPANT: I understand that you gave a press conference last week and you talked about how -- saying I think maybe I am (inaudible) your words but have been more focused on doing things like closing down trading floors and the like and that you were going to put a stop to this. And you thought that was still a very important piece of the value proposition in the exchange. Does that mean specialists are not going to be let go at all at this point; you're not going to try to trim that operation? What is exactly the future of the specialists?

DUNCAN NIEDERAUER: We will start with what I said because I'm sure everything is, I won't say anything about the media in this room, but I think a lot of things don't come out the way we want them to. So what I simply said is actually the last two trading rooms I've been responsible for closing, not John [Thain]. And it was my decision that when I got there we had people spread out in four rooms and I thought we would have a much tighter community and it would be easier to get things done if we put everybody in the two larger rooms. So we then encouraged all the brokers to find space in the two larger trading rooms, and we took a three or four-step process and we consolidated the specialists in the front two rooms.

My point at the press conference last week was I don't plan to close the trading floor. It is not on my even long list of things to do. I think it is an important part of our brand and of our value proposition. I think we -- is it something where we use as a lever, every day, human judgment? No, there are days when it is very quiet; where I think I would be the first to admit and some of most of the floor community that it is not a differentiator. In periods like expirations, in periods of higher volatility like we saw last August and this past January, I think it is quite a differentiator because everyone else doesn't have a lever they can pull. So when you get into volatile periods like that, people want to use the floor or they want to get human judgment involved or they want to use the experts. So I don't see that going anywhere. And in fact, on the back of the AMEX acquisition we will be reoccupying two of the rooms that we vacated. They will have a small equity floor in the back and a small options floor in the back. So we will be back to where we are
using four rooms again.

That shouldn't be interpreted to suggest that we don't embrace technology. We do. We are improving the technology all the time. But the decision on how the floor is staffed is not up to me and Christian's question is one that we get a lot. Remember no one in the specialist community actually works for NYSE Euronext. So their staffing decisions are reasonably independent ones. All we ask is that they have enough people that as we improve the technology they are able to do things more efficiently. We just ask that they have enough people that they can do their job effectively and that is really their job and that is how we work it out.

The same with the broker community. I view my job as giving the broker community on the floor the opportunity to run a business and to be successful. What they do with that opportunity is up to them. The guys that leave have said to me, I see you giving us the opportunity. I just can't evolve my business model or I don't have the relationships to make it work in the new era. Other people have said, thanks for the opportunity. we're going to make it work, and they are really running what I would call agency brokerage businesses just like you would have right here in an office in midtown; they just happen to have their office on the floor of the New York Stock Exchange instead.

So I think the floor population certainly could get smaller as we roll out more technology, but it is not our plan to close it or to make it all electronic all the time. That is not even anything we are contemplating.

UNIDENTIFIED PARTICIPANT: How much smaller do you think it could get?

DUNCAN NIEDERAUER: I think you could consolidate the two rooms into one. Because I think as we roll out more technology and we change some of the rules, it is easier for more of the risk management of the specialists books to be done remotely. So I think they would need fewer people on the floor, and I wouldn't stand in the way of that -- so I could see us just being in the main room eventually. Again, not imminent but I could see that.

UNIDENTIFIED PARTICIPANT: In terms of numbers what does that mean?

DUNCAN NIEDERAUER: We are at about 650 now; in terms of this is not including the AMEX people who will come, so we are about 650 license holders now. And there is probably another 200 people down there every day you don't hold a license, that are just clerical and things like that. So could that go down by another 15% or 20%? Sure. Is it going to zero? No time soon, probably never.

UNIDENTIFIED PARTICIPANT: Over what period is this new technology going to be rolled out?

DUNCAN NIEDERAUER: We're in the process of doing it, and we've been doing it for the last year and I would say the rest of it will be rolled out kind of by October and November this year.

UNIDENTIFIED PARTICIPANT: So that 15%, 20% could be (multiple speakers).

DUNCAN NIEDERAUER: By the end of the year, yes, I could see that.

UNIDENTIFIED PARTICIPANT: But you could see a situation where you keep the floor but really it is not the main operating center in any way. It is like your marketing --.

DUNCAN NIEDERAUER: Yes, you could argue it is not -- 90% of the business is done electronically now. So you could argue that whether that number is 10 -- in August and January that 90% was 70%. So all I have said to the floor personnel is you are not needed in every trade anymore. So let's get you involved when you are needed and when you're adding value; let's not force the equation, let's try to find equilibrium, and let's not create disequilibrium. So I think by us keeping it some people think we are overprotecting it. We are not. We just say the market is going to tell us what to do. The market is telling us get faster. The market is saying this is the market model I want you to have; we think we've got the pricing about right and then people just decide and they do what they want to do. But I like the lever.

UNIDENTIFIED PARTICIPANT: Is there a danger from a marketing perspective that there won't be enough people there and there are occasions when (inaudible) and doesn't seem quite like the old (multiple speakers).

DUNCAN NIEDERAUER: There were 2000 people there and now there are about 800. So it is not like the old NYSE, and it's never going to be like the old NYSE. If it were that would mean we completely did not embrace technology and we failed to evolve and we are not going to make that mistake and I think everybody gets it. So we will probably have closer to 1000 people when we bring the AMEX folks over and the equity group will probably come over in November and the options group will probably come over in February and then we will just see what has happened with our own technology between now and then and ultimately you take what the market gives you. You can't take more.

UNIDENTIFIED PARTICIPANT: Is there a danger that my kid's kids will be shown this kind of almost like Disneyland type of thing in 20 years time?

DUNCAN NIEDERAUER: I don't know. It doesn't seem that way to me, but I am in the minority. So everybody certainly thinks that's the case. I don't -- even if it just ends up being for the brokers, I think it is quite an interesting proposition for an agency brokerage that they can't have anywhere else in the world. So as long as there is price discovery and periods of volatility or at the open and close every day, I think those agents down there can run as successful a business as someone could in midtown if they've got the right relationships. And yet they have proximity to another feature of their business model that no one else sitting here [in midtown] can have. But look, I said when I got there, I thought I would be there for four or five years and so would the floor. And one year down the rest to go, see how they go.

Happy Monday, folks. Or is that an oxymoron? On This Day (NYTimes.com) in 1897 came perhaps the greatest quote in journalism history, when Mark Twain told the New York Journal that the "report of my death was an exaggeration."

Today also is the 67th birthday of the excellent Charlie Watts, drummer for the Stones. I've always admired his ability to perfectly match his performance to the tune, no matter whether it's a propulsive rocker or a subtle ballad.