Top of the News: COMMENTARY
AFTER-HOURS TRADING: A VERY SMALL STEP BY THE BIG BOARD
As the New York Stock Exchange faces the perils of global competition, many investors and traders view the NYSE as stodgy and unimaginative. Its venerable specialist system, in which floor brokers are charged with making orderly markets in stocks, contrasts sharply with computerized overseas stock exchanges and private stock-trading systems that have snatched away much of the NYSE's business. Well, the Big Board is taking a bold step to meet this challenge. On May 20, the NYSE won approval from the Securities & Exchange Commission for limited after-hours trading.
For the NYSE, this will be an all-but-revolutionary departure from the past. Come June 13, investors will be able to enter buy and sell orders for NYSE-traded stocks for one hour after the 4 p.m. close. The trades will be executed without involvement by the specialists. The after-hours price will be where a stock stood when the gavel thudded at 4 p.m., if buyers and sellers can be found. Likewise, the exchange will permit after-hours program trading until 5:15 p.m.
A milestone? Absolutely. But will the exchange's new initiative win back a significant chunk of the business it has lost? The answer, in all likelihood, is no. The competition is too adroit and well-entrenched--and the NYSE's new trading endeavors simply do not offer enough. No wonder even money managers who welcome the NYSE's initiative are unsure what competitive advantage, if any, the new system offers. "The NYSE is taking a small step in the right direction," says William Dodge, portfolio manager of Du Pont Co.'s pension fund. But while he applauds the new hours, he won't commit to taking advantage of them. "If we wanted to trade after close," Dodge notes, "there are offshore ways to effect those transactions."
Indeed, the NYSE system will pose only a limited competitive threat to overseas bourses that trade U. S. stocks. More than 185 U. S. companies list their shares in London, while 70 trade in Tokyo, and the stocks trade as they do in New York, with prices rising and falling as market conditions warrant. Much of the trading of U. S. stocks in London is program trading, because disclosure is minimal--and so are costs. The competition has consistently beaten the NYSE's transaction charges.
The exchange's new after-hours system for program trading does provide an alternative to engaging in such trades in London, by imposing no transaction charges, and by not disclosing price and volume information on individual stocks. Likewise, the other after-hours system will perform--for a brief period of time--a function similar to the private order-matching systems such as the Crossing Network, Instinet, and POSIT. The exchange will waive fees for six months, providing a likely advantage over the competition. But it's doubtful that the NYSE's longer hours will break money managers of their long-standing trading habits. "If somebody has the ability to trade elsewhere, they won't change unless they have to," observes Bernard L. Madoff, president of a firm that engages in off-floor trading for institutional customers. "The NYSE will have to offer customers something that they don't already have--and I don't know what that is."
MEDIOCRE. In any business, matching competitors isn't the object--beating them is. And the NYSE's record as a competitor has been mediocre at best. A few years back, it established the New York Futures Exchange, which tried but failed to compete with the Chicago commodities exchanges. More recently, it introduced "stock baskets," which were supposed to simplify program trading but failed to snare program traders.
Indeed, the NYSE's after-hours trading setup seems to offer a clear advantage only to the most competitively insignificant element of the investment world--small investors. Unlike its electronic competitors, the exchange's after-hours system will be open to everyone. Ordinary folks will be able to trade a few shares--if their brokerages can line up buyers and sellers. "An institution can easily do trading in London and Tokyo, but most investors don't have that kind of clout," an NYSE spokesman points out.
But the NYSE's main challenge is to win back large customers, not small ones. The big customers should like the fixed-price feature of the new after-hours system, since it gives them the chance to trade large blocks of stock without moving the stock's price.
Even so, the NYSE's new trading hours are not enough. The exchange has said it will expand off-hours trading "to keep pace with demand." But what if its initiative is so feeble that there is only limited demand? Ultimately, the NYSE must meet its foreign rivals head-on by moving to round-the-clock trading. It could also extend its fixed-price trading hours. And it must do all this while getting costs into line. Like any business facing tough competition, the NYSE has to make some choices that won't be universally popular. Half-measures won't suffice.