New York Stock Exchange
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Authors
Authors: Sanjib Dutta, K Subhadra,
Faculty Member, Faculty Associate,
ICMR (IBS Center for Management Research).
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The Role of Specialists
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The specialist system at NYSE attracted considerable criticism. In April 2003, the SEC initiated an investigation against trading violations committed by the specialists. The specialists were alleged to be involved in front running7. However, NYSE refuted the charges and said that SEC was inquiring over violation of negative-obligation rule8. But analysts pointed out that the objective of the inquiry remained the same though the rules violated differed. The primary question which NYSE needed to answer was whether, its specialists purchased shares at lower price with an intention to sell them afterwards for profit. The firms which faced the investigation included - Spear, Leeds & Kellogg (subsidiary of Goldman Sachs), Fleet Boston Financial, Bear Wagner (partly owned by Bear Stearns), LaBranche and Van der Moolen. |
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It was reported that in the early 2000s, when businesses were reeling under pressure due to slowdown, specialist firms at NYSE posted pre-tax profit margin of 35-37% against the 9.7% margin of the corporate America. This raised questions about the working methods of specialists. Many felt that specialists took unfair advantage of the exclusive knowledge of investor orders.
Further, analysts were also critical about execution of orders at NYSE. Investors could not execute their buy/sell orders immediately as they were required to go through specialists or floor brokers paying high commissions.
The Final Assault-CEO Compensation
NYSE also faced increased criticism because it did not reveal its executive compensation figures. With increasing pressure from media and SEC, NYSE announced the executive compensation figures in August 2003. It announced that Grasso was paid lump sum amount of $140 million for his services and his employment contract was extended up to the year 2007. Further the exchange also revealed that Grasso would be receiving around $1.4 million as salary per year and a bonus of $1 million per year. In addition, NYSE also announced that Grasso was entitled to receive around $48 million in future as benefits. Grasso's pay package attracted criticism from all quarters. Due to increasing criticism, Grasso announced that he would not take $48 million. Grasso's pay package was publicly criticized by Donaldson. Donaldson issued a statement saying that Grasso's pay package raised doubts about the NYSE administration and asked NYSE to submit the minutes of the meetings in which Grasso's compensation was finalized. Meanwhile, Washington Post10 reported that members of the executive compensation committee were appointed by Grasso himself. The composition of the compensation committee also received serious criticism. Many were critical that the compensation committee comprised of executives from the companies which were regulated by the NYSE. Further Fortune reported that one of the NYSE directors through an email claimed that board members who were not in compensation committee never knew the breakdown of the Grasso's pay deal11.
7] An illegal activity in which a trader takes a position in an equity in advance of an action which he/she knows his/her brokerage will take that will move the equity's price in a predictable fashion.
8] The negative obligation ensures that specialists do not get involved in the market on their own behalf when the market is able to "make itself" and sufficiently match buyers with sellers. This obligation on the specialists provides the public an opportunity to transact with one another without the intervention of the specialists.
9] The SEC was investigating the charges of violations by specialists' way back in early 1990s As a result of SEC investigation, one floor broker was banned from the securities industry.
10] Leading US newspaper.
11] Tully, Shawn, See Dick Squirm, Fortune, September 15, 2003.