Wriston, Walter B.
To Market, to Market by Walter B. Wriston for The Washington Post
A review by Walter B. Wriston for the book, By Marshall E. Blume, Jeremy J. Siegel and Dan Rottenberg Norton.
AMERICA HAS always had a love-hate relationship with Wall Street, and to many the New York Stock Exchange symbolizes all that is good and bad in our system. Because began as an Exchange-sponsored study by Marshall Blume and Jeremy Siegel of the University of Pennsylvania's Wharton School (only later joined by financial journalist Dan Rottenberg), one might assume that it would emphasize the good part of the equation. Wisely, presents a balanced view of the rise and relative decline of this Wall Street institution.
The authors trace how the interaction of government, changing markets, and technology built today's modern exchange from its humble beginning in 1792, when 24 brokers standing under a buttonwood tree on Wall Street signed a one-sentence (the big law firms were not yet in existence) exclusionary trading agreement. The signers of the "Buttonwood Agreement" wanted to establish "a monopoly commission price for their services ... and to give preference to each other in their trading transactions."
In those days monopoly was not a dirty word; many monopolies were sanctioned by government, and it was not until 1890 that the Sherman Anti-Trust Act was passed. Succeeding generations of brokers have sought to protect their profits by preserving some kind of monopoly power in a centralized market. Fixed commissions, regardless of the size of the transaction, were the tactic of choice. As long as individuals with little leverage initiated the majority of trades, the fixed-commissions structure could be sustained, but the balance of power shifted away from the Exchange when huge investment pools were created, in part, by the unintended consequences of government action. Wage and price controls in World War II combined with a 93 percent tax rate encouraged corporations to create tax deductions by establishing pension plans that gave workers benefits. Pension funds grew and began buying equities in the 1960s; by 1975, these big investors constituted 75 percent of the market. Like all big buyers, they demanded volume discounts. The battle was prolonged, but in the end the era of fixed commissions belonged to history. The Exchange's rear-guard action in delaying this reform helped create and fuel a robust competitor, an automated national exchange called NASDAQ.
Markets respond to needs, and in our early history there were few corporate securities to trade. The building of the railroads in the mid-1800s required huge amounts of capital, and the sale of their securities made business on the Exchange boom. When the telephone came into common use, investors across the country could bypass local exchanges to trade on the New York exchange. As telephone technology improved, many local exchanges, which numbered over 100 in 1900, went out of business.
The crash of 1929 spawned the Pecora investigations which begat the SEC, and for the first time government regulation intruded directly on what up till then was basically a self-governing club. The club was organized by the members, the specialists, the floor traders, and the two-dollar brokers. They had little incentive to change the rules: They were all making money. Little by little the combination of institutional buying power and the growth of technology permitted traders to bypass the Exchange altogether and execute their trades in other markets. Despite this loss of business, the Exchange failed to gear up its operations to be competitive.
In 1968-69 disaster struck when the back offices of brokers, banks and the Exchange itself could not handle the avalanche of a 20-million-share day. Millions of dollars of unpaid dividends floated from broker to broker with no clear record of ownership. Few now remember that, in what the authors call a "Band-Aid," the Exchange closed down on Wednesdays and shortened other trading days by 1 1/2 hours. If anything, the authors underestimate the chaos and the effort it took to build a new system. The action to restrict trading hours was only a tourniquet that bought time to get to the emergency room. "The back office crisis," they correctly say, "had forced open the door to technology, which in turn would force open other doors."
As technology made possible a whole gaggle of new competitors with the Exchange, the members gave ground to their customers' needs grudgingly. "Here is the supreme irony," the authors write. "Throughout its history this bastion of the free-enterprise system has been operated as the very model of a socialist collective." To survive it must innovate, but to do so may step on the toes--and pocketbooks--of its members. The authors' suggested solution is to turn the Exchange into a for-profit corporation to provide services to brokers and investors. This plan would give the Exchange the best chance to make the transition to the global market that others are already serving.
The authors give few pictures of the many colorful characters who have worked the Street; their influence for good or evil is missing from this well-written and -researched book. Like the members themselves, the authors see the handwriting on the wall as alternate markets take more and more business away from the Exchange. And yet they conclude, "The New York Stock Exchange remains the world's most open and best-monitored market." Whether it will remain so depends on how well the current generation of brokers understands what is happening to global markets.