Last Tuesday, after the Big Board announced that one of its seats had sold for $975,000, the lowest level in nine years, 74-year-old Jim Maguire smelled opportunity. Mr. Maguire, managing director of floor-trading specialist firm LaBranche & Company and longtime Exchange member, bought the next seat available, acquiring it in his wife Diane's name for $1 million.
"We've bottomed out," said Mr. Maguire, who has 55 years of trading experience.
Given the problems facing the NYSE, many would suggest that Mr. Maguire is out of touch.
But he is not alone. Veteran NYSE members Ted Weisberg and Stuart Frankel have also purchased seats (i.e., ownership interests) over the past several weeks.
Once considered a symbol of the nation's financial strength and security, the 212-year-old New York Stock Exchange is under siege. With SEC probes into its business practices, continued fallout from the scandalous departure of chairman Richard Grasso, competitive threats to its people-based trading model from all-electronic exchanges, and depressed trading volumes from a listless market, NYSE members have plenty of reasons to sell their "seats," an anachronistic term coined in the 18th century when members sat in assigned chairs during the roll call of stocks.
The price of a seat, which confers the right to trade securities on the Exchange floor, has dropped sharply from its August 1999 peak of $2.65 million, and is off 35% in the past year. At the same time, the number of seat sales has risen. The NYSE has announced five so far this year, and 30 in 2004. Just 18 seats changed hands in 2003, and six in 2002, according to the NYSE.
Mr. Weisberg says he has seen this before.
"At the end of the day, the place works," said Mr.Weisberg, 64, president of floor brokerage Seaport Securities, who bought his first seat in 1974 and purchased his second two weeks ago for $1 million. "When I considered buying my first seat for about $50,000 during the 1973-74 bear market, everyone said I was crazy and told me the place was going out of business. I'm glad I didn't listen."
Mr. Weisberg suspects that many of the recent sellers are members who lease their seats and are disappointed with the current yield on their investment. Today, roughly two-thirds of the Exchange's 1,366 seat owners are lessors. (The number of seats has remained constant since 1953.)
"During the bull market, it became an open secret that a seat had become an extremely attractive investment for non-industry people," said Mr. Weisberg, whose son and daughter work with him. "For awhile, they generated spectacular returns, but not anymore."
In 2001, the lease rate peaked at $360,000 per year. With seat values hovering in the $2 million dollar range back then, seat owners achieved very favorable 15-20% rates of return. But with lease rates today now quoted as low as $57,000 per year and a seat valued at roughly $1 million, seat owners are seeing a less compelling 5-6% return on invested capital.
"I'm not sure I'm terribly sympathetic to the members that lease their seats," said Mr. Weisberg. "For years, they have generated great returns. If somebody is now unhappy with their lease income they are free to sell. I figured I'd buy a seat and use it to run my business."
Additional seats, whether bought or leased, enable floor brokerages like Mr. Weisberg's Seaport to send more traders onto the Exchange floor. This added capacity allows brokerages to execute a greater number of client orders and earn more commissions in the process.
A contemporary of Weisberg is Stuart Frankel, 64, who bought his first seat in 1970 and whose floor brokerage firm, Stuart Frankel & Company, bought its fourth at the end of November (it leases three more).While his fellow members sell into a weak market, Mr. Frankel is happy to invest in what he considers a prized asset at depressed prices. But he has not always seen it that way.
"Ever since I first stepped foot on the NYSE floor, I saw it as a dated institution" said Mr. Frankel, who remains active in the business but turned floor operations over to his two sons. "With everyone running around in smocks and ripping up paper, it always struck me as an illogical world. I never thought of a seat as a particularly good investment, just a ticket to get into the ballpark."
But Mr. Frankel, for the first time in his 43-year career, views a seat as an attractive investment. He believes that the NYSE, now under pressure by regulators and clients to change its business practices and update its trading systems, is at an inflection point. And, in his view, change is good.
"The NYSE is among the most powerful brand names in America," Mr. Frankel asserts. "The value of the franchise remains strong. If the Exchange successfully modernizes the way it does business and effects even the slightest bit of change, the brand's strength will endure."
"I've been a member for 35 years and thought the place would always stay the same," he says. "But at the end of 2004, I realized that the Exchange, kicking and screaming, was finally going to change. [NYSE chief executive and former Goldman Sachs president] John Thain wouldn't leave Goldman Sachs and is too smart a guy, to preside over the funeral of the New York Stock Exchange."
Mr. Maguire, whose high-profile role on the floor is to manage the stock trading of Berkshire Hathaway, Warren Buffett's holding company, echoes Mr. Frankel's sentiments. "We're not going to be automated out of business," he says, responding to critics' assertions that the Big Board's auction process - where human beings like Mr. Maguire match buyers and sellers on the floor - is hopelessly outdated. "When our hybrid program is rolled out later this year, combining the best of the auction market with electronic trading, we're going to be automated into business."
To many observers, Messrs. Maguire, Weisberg, and Frankel are like the band members on the Titanic, playing upbeat music on a sinking ship. Despite the veterans' optimism, NYSE doomsayers outnumber its cheerleaders. All-electronic exchanges like Nasdaq, Archipelago, and Liquidnet have waged aggressive lobbying campaigns against the Big Board, urging the SEC to institute rules that would allow them to compete more effectively. They argue that the NYSE, the world's largest equity market with an 80% market share in the stocks that it trades, is a virtual monopoly that must be broken up.
And it is not just the competition that foresees the Exchange's demise. "At this rate, it will soon cost more to drive a cab," said one hedge fund manager, referring to the approximately $300,000 price of a New York City taxi medallion. A recent Wall Street Journal editorial critical of the NYSE called it "the queen of the slow markets." In New York magazine, market commentator Jim Cramer predicted that in 2005 the NYSE "will become part museum, part financial-district Bowlmor Lanes."
Mr. Frankel, of course, disagrees. "I would remind our critics of an annual Exchange tradition that began during the Great Depression," he explains. "On the last trading day of the year, everyone gathers around to sing 'Wait Till the Sun Shines, Nellie,' an old song about a rainy day and the promise of better times ahead. That says a lot about this place."