The New York Stock Exchange proposed sweeping corporate-governance reforms and analyst rule changes in 2002, a year highlighted by historic developments in investor protection, including a record number of enforcement cases. The Exchange also set new records in trading volume and further expanded its Network NYSE family of order-execution and market-information products and services.
Enhanced Investor Protection
Following a comprehensive review of its corporate governance standards initiated in February, the Exchange filed rule proposals to enhance the accountability, integrity and transparency of the Exchange's listed companies and strengthen the checks and balances among investors, issuers and the market. The most significant proposals, filed in August:
- Require corporate boards to consist of a majority of independent directors;
- Require nomination and compensation committees to consist solely of independent directors, while enhancing standards applicable to the independent audit committee;
- Require that shareholders must vote on most stock-option plans.
The NYSE and NASD also announced a new committee comprised of leading representatives of the private and public sectors to extensively review the initial public offering process and recommend changes to address the recent problems and strengthen the underwriting process. At the SEC's behest, the committee will evaluate existing rules and statutes and recommend rule proposals or other changes needed to strengthen the integrity of the IPO process.
On Dec. 20, the SEC, the New York Attorney General, the North American Securities Administrators Association, the NYSE and the NASD announced an historic $1.4 billion settlement with the nation's top investment firms to resolve issues of conflict of interest at brokerage firms. This global settlement concludes the joint investigation begun in April by regulators into the undue influence of investment banking interests on securities research at brokerage firms. Each of the firms will pay a fine, pay monies toward investor restitution, and be required to escrow funds that will be used to pay for independent research and investor education. Key terms of the agreement include:
- The insulation of research analysts from investment banking pressure;
- A complete ban on the spinning of Initial Public Offerings (IPOs) to corporate executives;
- And an obligation to furnish independent research.
In 2002, the NYSE's Division of Enforcement superseded its previous record (set in 2001, when it prosecuted 236 cases), prosecuting a record 255 cases, including 35 actions against member firms and 220 against individuals, with significant penalties imposed, including suspensions and bars from the industry, as well as sizeable fines. Among the cases was that of Frank Gruttadauria, a former branch office manager, who was permanently barred from the securities industry for misappropriation of customer funds and failure to cooperate with the Exchange's investigations. Following an extensive review by the NYSE of the Gruttadauria case and others in which managers and brokers at branch offices used elaborate schemes to steal from customers, the NYSE's Member Firm Regulation unit proposed a series of regulatory initiatives to bolster member firms' internal controls and supervision.
Furthermore, following referrals by the NYSE's Market Surveillance division, the SEC instituted 10 enforcement actions for insider trading against 26 individuals and firms, resulting in asset freezes, fines and penalties totaling $8 million in 2002.
New Listings include 39% increase in Nasdaq-transfers, 94% of Qualified IPOs
During the year, 119 domestic companies listed on the NYSE, including 36 transfers from Nasdaq and seven from the Amex. The NYSE continued to attract a diverse group of leaders from all major industries, including Concord EFS, Inc. (CE), Network Associates, Inc. (NET), Emulex Corp. (ELX), Oshkosh Truck Corp. (OSK), Province Healthcare Company (PRV), and Getty Images, Inc. (GYI). Newly listed companies included 67 domestic IPOs that raised a total of $27.5 billion in new equity, continuing the NYSE's longstanding leadership of the market for IPOs and new listings. Without counting IPO proceeds for closed-end funds, domestic companies at the NYSE raised $17 billion in 2002, accounting for 93.8% of all qualified domestic IPO dollars raised, including large IPOs such as CIT Group Inc. (CIT), which raised $4.6 billion and Travelers Property Casualty Group (TAP), which raised $3.9 billion, as well as IPOs from Leapfrog Enterprises Inc. (LF) and Seagate Technology (STX). The Chicago Mercantile Exchange Holdings Inc. (CME) became the first U.S. market to list its shares publicly.
The NYSE listed 33 non-U.S. companies with a total global market capitalization of $260.7 billion at year-end 2002. World-class non-U.S. companies that listed on the Exchange included Allied Domecq plc (AED) headquartered in the U.K., AU Optronics Corp. (AUO) from Taiwan, Bayer AG (BAY) from Germany, Brazil's Banco Itau SA (ITU), China Telecom Corporation Ltd. (CHA), NTT DoCoMo, Inc. (DCM) from Japan, France's Sanofi-Synthelabo (SNY), and Thomson Corporation (TOC) from Canada. Eight IPOs from non-U.S. companies raised a total of $4.9 billion, including a $2.3 billion IPO from Switzerland's Alcon, Inc. (ACL). NYSE-listed IPOs from non-U.S. companies accounted for 100 percent of qualified non-U.S. offerings.
In all, the NYSE added 152 companies to its list, resulting in a total of 2,784 listed companies with a record 350 billion shares available for trading, and a total global market capitalization of $13.3 trillion.
Trading Volume Continues Growth
The NYSE was the only major U.S. equities market on which trading volume increased during 2002. At the Exchange, the world's largest and most technologically advanced equities market, trading volume reached unprecedented levels on a daily, weekly, monthly and quarterly basis. Eight of the NYSE's 10 most-active weeks occurred in 2002, as well as seven of 10 most-active volume days. On July 24, a record 2.8 billion shares valued at $69.8 billion were traded. July was the busiest month, with a total of 41.5 billion shares traded. The first three quarters of 2002 each set consecutive new trading volume records.
Average daily volume in 2002 was 1.44 billion shares, up 16% from 1.24 billion shares in 2001, and the daily value of trading was $41 billion. Non-U.S. volume of 135 million shares accounted for 9.3% of overall NYSE daily trading volume during the year, representing an average daily value of trading of $2.8 billion.
The NYSE composite index reached its high for the year of 609.53 on March 19. It closed this year at 472.87 a decline of 19.8 percent compared with its close in 2001.
Network NYSE Adds Latest in Innovative Products
Ongoing investment in technology increased the NYSE's capacity by 50% in 2002, boosting the NYSE's volume-handling ability from 2,000 messages to 3,000 messages per second. The increase is required to handle increasing volume and additional processing for new information products.
Throughout 2002, the NYSE continued to grow its Network NYSE family of order-execution services and market-information products.
In January, the Exchange launched NYSE OpenBook, a new market-information product that broadens customer access to depth-of-market data. Designed to further enhance the transparency of the NYSE market, NYSE OpenBook for the first time provides investors with a comprehensive view of NYSE limit-orders for all NYSE-traded securities, enabling market professionals to see aggregate limit-order volume at every bid and offer price outside the displayed NYSE quote. It displays more than 5 million limit orders per day, and since its introduction in January, more than 1,100 firms have subscribed to NYSE OpenBook. The product was expanded with the roll out of an analytic database in May.
Wireless activity on the NYSE trading floor continued to increase sharply through the use of NYSE e-Broker and the use of electronic, wireless linkages between brokers and specialists. The number of daily messages sent by e-Broker devices more than tripled over 2001 levels, with daily activity topping 130,000 messages per day.
NYSE Direct+, the NYSE's automatic order-execution product introduced in 2001, also experienced dramatic growth in 2002. The service, available for orders under 1,100 shares, averaged more than 500,000 orders a day at year-end 2002, accounting for 63 million shares, almost five times its 2001 average. With an average turnaround time of 2.5 seconds, this new service continues to experience exponential growth.
In November, the NYSE became the first U.S. equities market to submit all comparison data for all its listed securities real-time, message-by-message, for clearance and settlement as a step toward straight-through-processing. In December, the NYSE launched NYSE Broker Volume, a summarized ranking of all executed volume in each NYSE-traded security by member firm.
The NYSE and its technology subsidiary Securities Industry Automation Corp. (SIAC) launched Secure Financial Transaction Infrastructure (SFTI, pronounced "safety"), to guarantee diverse, fully redundant routing to the NYSE's data centers. Additionally, the NYSE and SIAC developed alternate trading facilities that are available for operation within 24 hours, should the NYSE's main trading facility be unavailable.
New Research: Deep Markets for IPOs; NYSE-listed Companies More Profitable
According to a new study released jointly by the Universities of Notre Dame, Delaware and the University of Georgia in 2002, the NYSE provides unusually high market depth for new issues at exceptionally low bid-ask spreads. The study found that a sample of IPOs listed on the NYSE between 1995-1998 exhibited unusually high bid and ask depth throughout most of the first trading day, which stabilized within two to three weeks. Specialists and underwriters acting through their brokers and trading floor participants played a key role in creating a fair and orderly market after the IPO priced.
Another new study released in 2002 by Eli Bartov, professor of the Leonard N. Stern School of Business at NYU, found that in terms of profitability, NYSE-listed companies consistently outperformed Nasdaq-listed firms. On the basis of earnings between 1997-2001, the study indicated that NYSE-listed companies collectively accounted for more than five times the earnings of Nasdaq companies during the period. The study also found that the average NYSE-listed company far exceeded the profitability of the average Nasdaq-listed firm.
New NYSE Indexes Track the Market
This year saw the roll out of four new NYSE-branded indexes. The NYSE U.S. 100, NYSE International 100, NYSE World Leaders, and NYSE TMT Indexes are designed to track the performance of certain segments of the NYSE marketplace. The NYSE also greatly expanded its role as a trading platform for exchange traded funds. In October, the NYSE listed the Fresco Dow Jones Euro STOXX 50 Fund (FEZ) and Fresco Dow Jones STOXX 50 Fund (FEU). These two new ETFs are based on the most popular and widely-used European market indexes which capture approximately 60% of the total market capitalization in Europe. The Exchange also began trading 33 ETFs on a UTP basis in 2002, bringing the total number of ETFs traded on the NYSE on a UTP basis to 36.
Holidays and Commemorations
Last year's terrorist attacks still had a noticeable impact in 2002. The NYSE observed the 1st anniversary of Sept. 11 with a delayed opening following the memorial service at Ground Zero. The Exchange's 79th Annual Holiday Tree Lighting ceremony was dedicated to New York City's Fallen Heroes for the second year. And, since Sept. 11, 2001, Exchange members and member firms, NYSE employees, listed companies and others have contributed about $10 million to the NYSE Fallen Heroes Fund.
The Exchange will be closed the following days in 2003: New Year's Day, Jan. 1; Martin Luther King, Jr. Day, Jan. 20; Washington's Birthday, Feb. 17; Good Friday, April 18; Memorial Day, May 26; Independence Day, July 4; Labor Day, Sept. 1; Thanksgiving Day, Nov. 27 and Christmas Day, Dec. 25.
