The NYSE and Nasdaq have changed considerably over the past 25 years but too often those changes have been mandated and imposed by governmental agencies. In the future, global competition and technology will force the NYSE and Nasdaq to become far more proactive in implementing changes. But we still see the stock markets dragging their feet when it comes to change.
Recently, the SEC has been focusing on reducing spreads by moving toward decimalization. The NYSE has kept quotes in eighths, guaranteeing a spread of one- eighth on dealer-handled trades. Some non-NYSE firms concluded that these spreads were too high and found an attractive niche for themselves by undercutting NYSE prices through rebates to brokerage firms. Again the NYSE lost market share but this time it was the retail customer who was being channeled to other markets. Following the new SEC rules, Nasdaq voted to reduce its minimum tick to one sixteenth. Two of the regional markets have already followed. Finally, the Board of the NYSE bowed to the inevitable and agreed to move to decimals with their smaller spreads and possibly lower dealer profits.
Again, outside pressure has forced the NYSE to become more competitive to the benefit of its ultimate customer, the public. Just as in 1975, these new SEC rules have made markets adjust to the current needs of investors. Significant changes in primary quasi-public institutions such as the big stock exchanges appear to require outside force. There seems to be too many diverse and conflicting interests within institutions such as the NYSE and Nasdaq for them to change from within. Yet, these institutions must learn how to embrace change.
We need the NYSE and Nasdaq, as well as other markets. Within a given geographic area, securities trading operates most efficiently when it is concentrated in a single market. In the past, that meant a single stock market in each big city; in the future, it will mean a single global stock market.
Whatever the similar capabilities of exchanges in London and Tokyo may be, the US has the world’s most open and best-monitored marketplaces for investors and traders. For a combination of size, openness and endurance, the NYSE and Nasdaq are unique. Together they can provide the best infrastructure for the most direct and least painful transition to a global market. If they fail to lead, they will find themselves left behind in the global marketplace of the 21st century.
Stock Exchanges: forces of change