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HEADLINE:
Corporate Governance - The Real Big Board Scandal
By: Staff Writer
Forbes.com. October 24, 2003
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EXCERPT: The New York Stock Exchange lists shares of 2,275 domestic companies. Those can trade anywhere, but the Big Board manages to hold on to 80% of the volume in shares it lists. Therein lies what a business owner would call a "franchise" value, or an academic "economic rent." It's the ability to extract a dime from a transaction without fear that a competitor could easily step in with an offer to do the same work for a nickel. John Wheeler, senior manager of equity trading at American Century mutual funds, figures the current system imposes a 0.5% trading cost (one way) on big orders, between commissions, spreads and the impact such orders themselves have on prices. Nasdaq, he says, costs only 0.2%, because there is plenty of competition--323 market makers handling Microsoft (nasdaq: MSFT - news - people) trades, for example. Were he to send in an order to the NYSE to buy 1 million shares of IBM (nyse: IBM - news - people) at $90 each, floor traders would jump in front of him by offering to buy at $90.05, knowing full well his order would push up the price. The best he can do is to parcel out big trades in small pieces. "It's a lot of intermediaries making a lot of money," he complains. To get a sense of what the listing franchise is worth, note that the 1,366 seats at the exchange are worth $2 million each, or a combined $2.7 billion. These seats entitle owners to trade either as brokers representing clients or as specialists with an exclusive right to conduct the floor auction in an assigned stock. The specialist franchises, with their highly profitable rights to a market-making monopoly, are probably worth billions more. The publicly listed specialist firm LaBranche (nyse: LAB - news - people) is valued at $800 million, even amid an NYSE investigation into its trading practices. Goldman Sachs (nyse: GS - news people) paid $6.5 billion in 2000 for Spear, Leeds & Kellogg, another big specialist that also makes markets in Nasdaq stocks and holds other valuable assets.
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