It’s a privilege and pleasure to be with the members of SIA.
I appreciate the opportunity to be with the leaders of our market-making and financial services community. I also believe that your theme – The New Era – is particularly well – chosen, both from our own perspective at the New York Stock Exchange, and from that of the markets overall.
We at the New York Stock Exchange are beginning a new era. And of course, speaking personally, I can say the same.
So, I thought I would address your theme in three ways:
- First, I’ll speak briefly about the new era of governance at the New York Stock Exchange…
- Second, I’ll discuss, if not a new era, certainly a new commitment by the Exchange to strengthen relationships with customers…
- Third, I’ll speak to the bigger picture, which is the emerging era in market leadership and market structure.
And I will speak about our plans to further develop our market.
Let me start by noting that the genesis of recent changes at the New York Stock Exchange was an urgent need to restore confidence in the integrity of our markets.
And because the Exchange represents such a significant part of the U.S. equity market, there was also a need to restore confidence in the U.S. financial markets overall.
Just to underscore that point in terms of our size and impact:
- We are an $18 trillion market --- five times bigger than any other exchange in the world.
- We trade in the neighborhood of 1.7 billion shares a day, a huge volume compared to past history.
- We offer the best prices over 90% of the time, so we are very competitive with other markets in the U.S.
- In terms of market share, we trade about 80% of the total volume of shares of the companies we list, with about 20% trading in competitive markets.
- We also offer the lowest cost execution and the lowest volatility.
So the size and core strengths of the Exchange are impressive.
However, before a single share is traded, investors want to be assured that the New York Stock Exchange is a place of integrity.
As you know, John Reed and I occupy our current positions because the governance system of the Exchange broke down. The consequences were harmful to the institution and painful for all. So, in September of 2003, John was asked to serve as interim Chairman. He then recruited me to become CEO, and I came on board January 15th.
Fortunately, John was there to take the helm at a critical time. His accomplishments are a tribute both to his personal leadership, and to the enduring strengths and resilience of the Exchange. When he arrived, John took a long look at the Board. He wanted to understand how problems of such magnitude could develop. He discovered a lack of transparency. A board that was too large.
So he decided to start with a clean slate, and build a new governance system for the future. And it is a testament to John’s leadership that his proposal gained swift approval.
Submitted to the membership November 4th, it won overwhelming approval by the Exchange on November 18th, and by the SEC. December 17th.The new governance architecture rests upon a foundation of three core principles:
- Independence,
- the separation of key positions and responsibilities, and
- transparency.
In each area, the bar is set high --– a clear signal to our listed companies that the New York Stock Exchange will lead by example.
First, in terms of independence – the change is stark and sweeping. Our new board of directors consists of individuals independent of any member or member organization, who are not CEOs of listed companies, and, with the exception of me, are not part of NYSE management.
In addition, we have gone from a large board to one that is dramatically reduced in size – to no more than 12 members. Every current and future member must be nominated as an independent director from outside the Exchange. The audit and compensation committees are completely independent.
We also wanted to retain the input from our various constituencies. So we created a Board of Executives, which includes representatives from investment banks, members--- both active and lessors--- listed companies, large institutional investors, and individual investors, to provide us with advice. The Board of Executives meets the same day as the Board of Directors, and the Directors typically attend the BOE meetings.
New independence will, in turn, be reinforced by a second principle, the separation of key positions and responsibilities.
The most obvious separation is that of leadership responsibilities between the Chairman of the Board and the CEO.
John Reed is responsible for the Board’s performance. I have day-to-day responsibility for the management and performance of the Exchange. Our Chief Regulatory Officer, Rick Ketchum, came on board last month. Rick reports directly up to a sub-committee of the Board of Directors, led by Marsh Carter.
So we have separated the operations of the Exchange, which I run, from the regulatory part of the Exchange, which Rick runs.
The third principle is transparency. Just as we place a premium on independence, and on separation of responsibilities, we are bringing the Exchange into the sunlight of transparency. Every aspect of the governance process will be transparent – its participants, their compensation, charitable donations and political contributions.
This year’s Annual Report and Proxy set the tone with financial disclosure that is unprecedented for the New York Stock Exchange. We know that it is important to lead by example, and we are endeavoring to do so.
Moving now to operations, my most urgent priority in these early days has been to restore investor confidence and strengthen relationships. So during these first months, I have focused on customers.
I’ve initiated changes to make the Exchange more responsive to customers, including listed companies and the buyside. Some of our larger institutional customers have said that they want to trade in a different way than we currently offer them. They want to trade electronically, immediately and anonymously. And they have the opportunity to do this in other markets.
So we are going to give our customers a choice. They can trade electronically. Or they can continue to access the benefits of the continuous auction process on the floor of the Exchange. We are committed to maintaining the advantages of the floor auction model for all investors.
I think it’s important to remind everyone that our auction market is a great American institution. When Vladamir Putin came to the United States, he visited the White House and the New York Stock Exchange. When Wen Jiabao, Premier of China came here, he said, “We want what you have. We want robust capital markets, and the New York Stock Exchange is our model.”
What makes this model unique and successful are several factors that are very important to our country.
- It provides choice.
- It ensures fairness for both institutional and individual investors.
- And, it provides results, - the best prices, the tightest spreads, the lowest volatility.
Only in the auction market are there specialists with a firm obligation to provide liquidity when there are no buyers or sellers at a particular price. Only NYSE specialists are obligated to trade against the trend, trades that most other market participants choose not to make. And NYSE floor brokers represent customer orders, provide accountability, and serve as an information conduit between customers and the market.
The result is that investors are better protected. They are better protected on opens and closes. They are better protected against disruptive events such as earnings surprises, and mergers and takeovers that can lead to order imbalances and heighten volatility. In addition, the auction model ensures fairness.
If you put an order in to buy a hundred shares of a stock, and an institution is trying to buy a hundred thousand shares, you have access to the same price. An individual can get the same price and the same access as any institution – and that opportunity does not exist in other marketplaces.
So people want choices. They want to be treated fairly and equally.
Just as importantly, at the end of the day, at the end of the trade, investors want the best possible execution. Speed and anonymity will be there for those preferring to trade that way. But for those seeking price improvement, it helps to know that there will be real advantages:
- Orders will benefit from a deep liquidity pool.
- There will be high levels of transparency with a real time limit-order book.
- And, thanks to ample liquidity, spreads will be tight, and the costs of execution and volatility will be low.
The end result is good for investors, good for our markets and good for the economy:
- Corporations end up with a lower cost of capital…
- Individuals keep more of their core assets…
- And investors receive the best price.
The New York Stock Exchange offers the best price over 90% of the time. Best price is the auction model in action. I believe that by delivering investors a choice --– electronic execution available immediately, or the floor auction, with the possibility of price improvement--– the Exchange will best meet all investor needs.
But that is not all we will be doing. Best price is the cornerstone of ensuring integrity and optimum service for investors in the capital-raising process.
Now, I have said that I am sympathetic to the argument that some of our constituents can better serve their investors by taking a price immediately available over one they may receive on the floor some 14 seconds later.
That is why we are committed to becoming a fast market. But once speed is no longer a factor, there is no justification for giving any investor anything but the best price. It should simply be – let the best price win.
Others, apparently, disagree. They are asking the S.E.C. to put their marketplace ahead of market principles. Unable to compete on best price, they’ve asked the S.E.C. for permission to opt out of the long-standing rule guaranteeing every existing order the best price. They want to create an exception to the rule.
And who will be hurt? Both investors and our markets.
A fair, honest and competitive market that protects best prices encourages an ample supply of liquidity, narrow spreads, low costs and low volatility, a win –win for investors as well as for markets. But policy decisions that favor the few over the many will tend toward less liquidity, wider spreads, greater volatility and higher costs.
In addition, if the best price rule is not maintained, the temptation will increase to engage in practices like internalization of order flow.
One thing is certain: Our principles of fair, honest and competitive markets have protected investors. They have enabled U.S. markets to grow to unprecedented size and to become models for the world.
Since assuming my responsibilities at the NYSE, I’ve had the opportunity to meet with individual investors, institutions, and listed companies. In those meetings, it’s been driven home to me that all of us in this room, all of us associated with the securities industry, still have a lot of work to do to repair the bonds of trust between Wall Street and Main Street.
For the good of our industry, and for the good of our capital markets, each of us needs to focus on that responsibility.
Each of us has customers, but the customers that we should be serving first and foremost are America’s 85 million investors. And we need to serve the needs of companies who depend on markets to raise capital, to build their factories, and to create jobs.
As market leaders, each of us has issues and interests that may loom large in the short term. This is perfectly understandable.
But over the longer term, I believe that we will be best served by ensuring our markets are based on the principles of transparency, choice, fairness and best price. Markets that investors can understand and trust.
I thank you for your time, and I will now be happy to take some of your questions.
