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I had just said to Bruce (Raynor) that I thought I was busy before he introduced me. I guess I have even more to do. Thank you Bruce for that kind introduction, it just scared me a little bit. This is my first time addressing the Council, so thank you first of all for inviting me, and secondly for everything you do.
Your commitment to shareholder rights, the focus on corporate governance--these are really important things that are only going become more important, and not less important. So thanks for all you do.
I realize that some of those confidences that we have tried to create over time are a little strained right now. You just heard the Secretary’s (Hank Paulson) remarks. We all can see what is going on in the economy not just here, but abroad. It’s a particularly important time to figure out how we address this crisis in confidence. I am going to talk a little bit about that today.
I thought it would be helpful to talk about the changing landscape. As Hank said, my goal is mainly to hear from you. I’m fairly new at this job. I celebrated my one year anniversary at the exchange yesterday and I have been CEO for just over four months now. So I am going to leave some time for questions, because I really want to hear from you on the things you want us to be working on.
I realize that in spite of all the things Bruce said about the company we are trying to run now, and what kind of a company it is as a public company, it is not lost on me that the person with my business card also has a number of other responsibilities that most other public company CEOs don’t have--in terms as being a spokesperson for the financial services industry, for investor protection. That has never been more important than in the past few months.
I would also be remiss if I didn’t thank Secretary Paulson for being my warm up act today. I think that’s a first for me. I noticed a bunch of people cleared the room and my impression is when the warm up band comes on usually more people come for the main act. So I know where I stand in spite of the order in which we went today. There is no Goldman Sachs conspiracy by the way, I promise you that.
So, as I said, I celebrated my one year anniversary yesterday - four months at the helm. When I think of how things have changed already, just in the short time I’ve been at the Exchange, it is quite remarkable.
Almost on a daily basis there are more ways for investors to access capital, access liquidity. One could argue there are almost too many ways to access liquidity right now.
Markets are consolidating. As I say to a lot of people quite frequently, think of the exchange industry just 10 years ago. You don’t have to go back much further that that. Just 10 years ago, the majority of exchanges were public utilities, almost certainly nationalistic and in many cases monopolistic, and none of them for-profit/public enterprises; virtually none of them. Now, here we are 10 short years later and almost none of those things I just said are true today.
Certainly in this country there is rabid competition for volume every day in all of our markets--certainly on the equities and options side and a little less on the futures side. The industry is largely comprised of global, now for-profit public companies, and engaged in consolidation, which we embarked on about a year ago with Euronext. That was just the first of what I’m sure will be many exchange mergers to come in the space.
I would predict that 10 years from now you will have seen an industry go from no public companies and an industry comprised of public utilities to where we will have five or six global exchange groups trading multiple products, really catering to investors’ needs in a number of different ways that exchanges had probably never envisioned doing. I’m fairly confident that it is unprecedented that an industry will go from that point to the point I just described in 15 to 20 years. So it’s amazing how quickly that is moving.
At the same time the global markets are getting more and more mature. As Bruce said I spent most of my career at Goldman on the trading and markets side. When I think of how much less developed so many of the markets are outside of the United States were as I went through my career as a trader, you look at them all now and there are plenty of alternatives for investors to go direct, if you will.
I get asked quite frequently: Why do we think a lot of the European companies that historically listed in the United States are delisting their ADR program? And a lot of people are concerned that it is all about U.S. competitiveness. The U.S. regulatory framework is quite daunting to a number of non-U.S. companies. I actually think things like Sarbanes Oxley, for those companies, might be a convenient excuse, but it’s really not at the root of the issue. Other issues may have a lot to do with our regulatory landscape; I don’t think this one does.
This really speaks to how much really easier it is to for investors like you to access the foreign markets, which was not true 5, 10, 15 years ago. Those markets themselves are much more efficient, much more liquid. They’ve all changed their market structure to become a lot more fluid. For many of those companies who wanted to list here years ago, I think they did it because their home market had none of those attributes but also because they wanted to attract shareholders from the largest capital market in the world. They wanted to get known and more potential costumers in various regions. As the world gets flatter and flatter those issues become less and less relevant. So as the European markets develop it does not surprise me that many of those companies have repatriated back to their home markets.
Last year we saw a lot of companies from Latin America and Asia continue to come to the U.S. capital markets to list. It wouldn’t shock me to see in 10 or 15 years a similar repatriation -- whether it be in China or South East Asia or Latin America , as those markets get more and more developed, for all those reasons that I just outlined.
Underneath that we are all very, very aware that we’re in a critical period right now. We’ve got the subprime-credit crisis. We’ve got declining home values. We have what appears to be a broader economic decline, soaring energy costs. It’s not a real pretty picture. You all know that. I’m not here to solve any of those problems. I’ll leave that to the experts here in Washington . But I do think there is a role here for the exchange to play, in trying to help during this crisis of confidence, and figure out what the industry would like us to bring to the table to be part of a potential solution.
We live in a world right now where investors have had to start to live with higher rates of volatility. Part of this has to do with market structure. While we certainly embrace technology at the NYSE, we believe in a high-tech, high-touch model. We think that there is a time and a place for human intervention and judgment. We think it’s got to be properly calibrated. You don’t over-protect inefficiency if that’s what it is viewed as.
At the same time, if everyone wants to turn this into a video game, one thing we are pretty confident in is that if it’s all electronic all of the time, there is limited price discovery. The average order size is destined to get smaller and volatility is going to be maximized because there’s not time for things like price improvement. That used to be a meaningful part of the market and, as often happens, things go from one end of the spectrum to the other a little too quickly. We’re not going to over defend a model that people don’t want.
We are going to listen to our customers. At the same time, we like having the capability in periods like we saw in August or in January—of human judgment. It’s easy for us to use that lever and where as on a normal day, 90 plus percent of our business is done electronically. In periods like that only about 60 or 70 percent of trades are done electronically. People realize milliseconds don’t matter in periods like August or January. It’s better to get it right. And if getting it right only takes a few extra seconds, that’s really not much of a concession to make.
In the new role, I get to travel a lot. I joke with my wife that my children see me more on television than they do in real life these days. So, I’ve had the opportunity recently to go Asia . I was just in India , Singapore and Malaysia about two weeks ago. I’ll be in China and Japan the week after next. And I spend a fair amount of time in Europe given the importance of Europe to our company. Many of you might think that a lot of those markets are looking at us saying: “Ah, they got what they deserved,” you know, that they don’t look at the U.S. as the standard bearer anymore. Regardless of what you believe about whether the economy, the global economy, is disaggregated, global markets are definitely not disaggregated.
The markets around the world are looking to us and saying: What are you guys going to do about it? They recognize that a healthy U.S. market is good for all of us. And they are asking us to do quite a bit. The reaction I’m getting, and I get asked about it every where I go, to the recent (Treasury) blueprint is quite positive and I share the view.
I think it’s aggressive, I think it’s sweeping. I think we are at a moment now where the country probably needs something like that. I agree with Hank that a lot of that is going to take a long time to accomplish. But some of the stuff we can try to accomplish in the short term. It’s very important for us to focus on this.
We live in a world at the New York Stock Exchange where we have a 75 year-old rule book. Many of the rules that we operate under came out of the ‘33 and ‘34 Acts. That makes it really hard to compete in today’s world, when you’ve got to go to a rule book like this and try to figure out which rules have to be amended, rescinded, rewritten, as we try to compete at what is an increasingly electronic landscape and increasingly global landscape.
So we would be very much in favor of leaning more toward principles than to rules. That doesn’t mean we necessarily favor a merger or don’t favor a merger. We do believe that the principles-based regulation that the CFTC pursues is better than the rules-based regulation that we have to live under. And that’s somewhat self-interested because it’s easier to be nimble. We’re required to be nimble right now. So if you ask us what we would vote for, principles-based or rules-based, we’d vote for principles-based.
We would stop short of saying a merger is required to accomplish that. A merger sounds like something that would take a really, really long time to us. And what we would ask in the short term: Can we harmonize around an approach rather than worrying about the requirement to harmonize between a merger of two enterprises?
In the long run that would be a good idea. In the short run there’s a lot more we can do. I hope we try to do some of those things in the short run rather than stand around and wait to figure out if a merger makes sense.
In terms to some other things that Treasury cited in the blueprint, there are more things that we can make progress on. The SEC deserves some credit for trying to make progress in the area of mutual recognition, in the area of accepting IFRS guidelines, etc. The changes we’ve already made to Sarbanes-Oxley are steps in the right direction.
We still do hear from a lot of CEOs outside of this country that it’s hard enough to run the gauntlet--the risk that you have once you get in here, of running the regulatory gauntlet. It’s not something they are that interested in. So hopefully we can do a little more there. That was the right place to focus. And the biggest thing, frankly, that the country needs to address--maybe this is a little self interested, too, as a public company CEO—is the personal liability we’re asked to take and the lack of re-legislation or whatever new legislation towards reform. It’s a pretty scary job to have right now.
You can work hard, you can do everything right. But that’s probably one of the biggest issues that makes a lot of people outside of this country quite nervous--the litigious nature of the United States .
At the Exchange, we have a lot of committees. We obviously have a lot of different constituencies, so we try to divide time among our different committees, such as our institutional traders committee and our brokerage committee. The other day I had the Individual Investor Advisory Committee in to see me.
So I’m asking all of them, like I ask you: What would you like us to be focusing on? What would you like us to be doing? There are key themes that we’re hearing from some of those groups. I just thought I share a few of them with you.
A lot of these may seem very obvious, but they’re obvious to those of us who have grown up in the equities market. Some of the characteristics I’m going to talk about that are very, very prevalent in the equities market actually don’t exist in either parts of the business that frankly have gotten much, much larger than what trades everyday. So some of the words they use are:
Sunlight--really meaning transparency. What you saw August and what you saw January was that the regulated markets actually worked. They were open for business. There was no liquidity strike, you could get business done. We can sit here and debate whether everybody likes the prices and whether they wish the prices were in a different place. The fact is, you get the information, you see your price, you’re able to transact.
They used words with me like obligation quite a bit. They feel that responsibilities and obligations come with being an intermediary and they’re not sure that in parts of the market, people necessarily believe in that any more. I think there’s got to be.
Accountability is a word that came up a lot. If you’re going to be in the business, certain responsibilities and obligation come with the right to be in the business. And if you’re going to distribute various instruments, shouldn’t you have to make prices and report trades and do everything a little more in the sunshine, is a point one alluded to.
Simplicity is another word I get quite a bit. You can hear from Secretary Paulson’s comments, this regulatory framework we’ve all created is actually quite complex. If we had a do-over we wouldn’t make it nearly this much of a patchwork quilt. What can we do about that? Your guess is as good as mine, but the simpler we make it--as I alluded to in my comments about the SEC and CFTC--if we can harmonize around a certain philosophy, the biggest thing we need to be nimble is just a streamlined rule process.
You know, we have a wonderful working relationship with Chairman Cox and his team right now. It just takes longer when you are trying to rewrite rules than when you’re just trying to move along principles. Anything that streamlines the process and makes it simpler would be great. Openness is really consistent with transparency.
I’ll talk in a minute about some of the things we’re doing to provide more information to the marketplace, but timely and useful information is critical to help investors make the decisions. In parts of our market, that information simply isn’t available. And it’s not required to be made available. We should all talk about that, knowing that as a former trader, I’m slightly torn because I realize we are not trying to do things in an over-regulated market and take all the liquidity out of the market. At the same time, there’s got to be more consistent liquidity provision principles.
And lastly, it’s really about representation of all constituencies. Everybody deserves to have a voice; everybody wants to have a voice. How do we provide that?
So, what are some of the things that we are working on? You know us by reputation. We try to be a standard bearer for corporate governance. Certainly as a public company, we need to work on that and continue to work on that. There’s some recent history that would suggest, when it was a club that Bruce talked about, some of that stuff didn’t get as well looked after as it should have been.
We know we have a responsibility, like few other companies, to really be a leader on that front. We want to deliver what our customers of all different constituencies want.
Exchanges, historically and not surprisingly—because a lot of them were monopolistic public utilities—didn’t have customer service near the top of their list of things that were important to them. So now we’re out quite frequently before customers, and a lot of the hires we’ve made have been in the customer service arena. We are listening to what the customers want and then try to deliver.
In terms of what out company is all about, Bruce alluded to a lot of things that have changed quite a bit—a lot of the things that we’ve done in three or four years. Three or four years ago we were a mutualized membership company. We’re demutualized. We’ve gone public. We’ve done mergers big and small. And we are in the process of acquiring the American Stock Exchange.
It is all about diversifying the array of products in order to give our customers more choices. We want them to be able to trade more products with us and trade in more regions with us, and I think you’ll see us continue to do that.
The market cap of the companies that list with us is about $30 trillion. That’s four times that of anywhere else and we do about a third of the volume that trades everyday in the global markets under our umbrella. At the same time, we’re trying to be, what I would call, a technology company.
The Exchange business is all about scale, it’s all about expanding and it’s all about using a technology platform that you can leverage in creating operating leverage as a result. So technology companies have to be innovative, again, right up there with customer service —not a word you would have used about monopolistic exchanges before. It’s critical to our future success if we are going to continue to have a value proposition with our clients.
What are some of the things we are trying to roll out now?
You’re going to see us rolling out more information about our opening and closing prices. I thought they were too opaque. I thought there was a lot more information we can publish. So, over the coming days and weeks, you will see more and more information leaving the building to give investors a much better idea—as we approach an open everyday or a close everyday—of how things are working.
We’re opening our stocks a lot faster. We realize that there is the right balance between human judgment and technology, as I said. At the same time, we don’t use that as an excuse to get a free pass. We’ve got to get open quicker so people can make decisions.
We are rolling out different functionality to clients outside of the building. Some of the arrangements that had to be made to get the original demutualization done were not going to be effective in the long run. So some of the functionalities that were not available to all our constituents are now being made available to all constituents.
The liquidity pools in the United States are very, very fragmented by now. Some are light, some are dark, there’s many different dark liquidity pools where - on one hand, they are helpful to investors to try to get block liquidity done, on the other hand, there’s just too many of them. So we are working on things at the request again, listening to the customer, from both the buy-side and the sell-side, to try to re-aggregate some of that larger block liquidity that I know is important to many of you.
We’re doing similar things in Europe . We realize that competition is coming to Europe and we are trying to do thing in concert with our customers over there to really define the next-generation marketplace. And I think you’re going to see us going more and more in that direction.
What does that next-generation market place look like? I believe its multi-product. I believe it’s global, and I believe it got to be all about making it easier and easier for customers to access it. So that they can trade it and when they get there, having a lot more information at their fingertips to be able to do it.
So the question is: When do some of the good tenets that have found their way into equities and options markets structures find their way into these other instruments? And I will be happy to talk about that in Q&A and more importantly, get your advice and opinions.
Lastly, before I open it up to questions, you have our firm commitment that, on a going- forward basis, we are going to work with the Council anyway you’d like us to. We think we can be a spokesperson for some of these important matters. We know you can be, too. We’ve had examples in recent history where collaborating has helped us advance the cause on various important matters.
So my message really is that we are in this together. I’m new at the job, but I understand the markets pretty well and I understand the importance of the role of the person who has my business card can count me in. I’m happy to help on whatever you think are the most important issues.
I would just ask you to keep in mind that whatever changes we make, we have to make sure that we line up incentives as best we can. A lot of what caused us to get off the rails in the last six or eight months, in some of these markets as the Secretary has pointed out, involves some of the mortgage origination business. You layer that against the financial literacy or lack there of in major parts of this country and I think that was a prescription for disaster—which is easy to say in hindsight. However, the interests of that potential homeowner or mortgage holder and the person trying to sell it to them clearly are out of alignment. We have to think about those things as we are going forward.
Our message is going to continue to be: Let’s all work together. Fair and orderly and liquid markets usually equal and high quality markets. So let’s work together to figure out how to bring some of these things, like transparency and accountability, into all the markets which I think will make it better for all investors.
So I’m going to stop there and I’m delighted to take any questions. Hopefully not as challenging as the ones you asked the Secretary.
Council of Institutional Investors (CII) -- Questions and Answers
Question: I’m one of the founders of the ICGN… I invest in Europe incidentally. What is the next step after the NYSE Euronext merger, towards Asia particularly?
Duncan Niederauer:
Asia is going to be an incredibly important region for us, at the same time I don’t think it’s going to play out very quickly. On my recent trips to Asia two things are quite clear to me.
One, that we provide sufficient evidence to many of those exchanges in that region; that we view ourselves as a very attractive partner for them, in what ever form that takes--I’ll get to what that might mean in a minute.
The second thing that’s very clear is that, because of the almost iconic nature of the NYSE brand, we are everybody’s first choice to partner with. Many of the smaller Exchanges would love to figure out a way to be under our broader umbrella, the challenge is; we’ve already seen a lot of consolidation in Europe . So by that by the time John Thain decided it was a good idea to merge with Euronext, and the Euronext people agreed, Euronext had already amalgamated 4 or 5 exchanges and other consolidation had already gone on in Europe . You already had the Euro and European community had already happened and they may have been potential catalyst for that.
No catalyst like that is on the horizon in Asia . So we’ve spent a lot of time in the region, and I would expect us to do more and more there. So far it’s taken the form of small investments, some joint ventures and those joint ventures are usually around commercial technology efforts. Several of the Exchanges in Asia and more to come, I think, will end up using our connective technology, our exchange engine technology and probably our networking technology over time.
And I think you’ll see us in the short run, do more of that and I don’t think that leads to, what we would think of as more traditional M&A activity for quite some time, but we obviously have our eye in the region; we think it’s critically important.
Question: Good morning, I’m Mike Carlin with the CTW investment Group. I had a question about broker voting and director elections. Director elections have finally become meaningful with more and more companies adapting majority vote policies. But unfortunately the deck has been stacked with management because of the broker vote. And the New York Stock Exchange, with strong support from the council, has proposed eliminating the broker vote from director elections, uncontested director elections and I want to commend the Stock Exchange, but you’ve gone through two rounds now, and it’s stalled at the SEC .
So I want to accept your invitation about how we can work together; and what can we do, and what can you do, to get the SEC to move on your very worthwhile proposal.
Duncan Niederauer
Right, I appreciate you raising that. I think that is a good example, which obviously predates me so I don’t want to take any credit for it; but I think it’s a good example of where the Council and the Exchange did work closely together and I think there’s always strength in numbers on these issues.
If you’re down here alone or we’re done here alone, it’s not nearly as powerful as if we are doing it together. At the SEC right now, we’re in transition with commissioners. I think there is some hesitancy, maybe rightly so, that you don’t want to put things through that may not be viewed as controversial by you or by me but by other parties. I think that the Chairman’s view, it seems to me from afar, has been if it’s something that is obviously non-controversial let’s not slow it down. If its got some controversy, let’s make sure that, even if it’s taking too much time, let’s make that we’re doing a little extra due diligence since we don’t have a full slate of commissioners right now.
All we can do is remember what got us here and we can take another whack at this together. I’m very confident that this is going to see its way through. I don’t think this is being filibustered. I don’t think it’s being held up. I think it’s inevitable that this will get done but I think all we can do together is just keep the heat on. And that’s a good example of…we probably pushed that issue harder than we might have with encouragement from the Council. That’s the history lesson I’ve been told. Thank you for your input.
Same Questioner: Thank you. It’s certainly not controversial within this room … stand ready to support you.
Duncan Niederauer:
I know its not, I’m with you. And I think we’ve got other things down at SEC , in fact I was there this morning before I came to listen to Mr. Paulson’s speech and give my own. I think there are a host of issues that all it takes are one or two parties who don’t agree with what we’re trying to do and it’s fairly easy to elongate the process. That’s one of the things we talk about when we say there should be an opportunity for people to chime in but there should be some limit to how long that period takes and then we should just get going with some of these things. So, I’m sure if you have the opportunity during some of your time here at the conference to see any members of the SEC , I would encourage you to ask them question directly.
Question: Yes, George Dallas with F&C Investments in London . Your geographic expansion offers not only diversification geographically but you might also argue that it offers diversification in terms of listing standards, i.e., if the New York environment is perhaps perceived as more rigorous than jurisdictions, then to the extent that the company broadly pick up new listings or business in other markets, then maybe that’s to the good. I don’t know if you accept that characterization or not but, I guess my question is, as you expand into different jurisdictions, to what extent, in terms of listing standards or other types of governance standards, are you going to be continuing to allow differentiation to exist according to actual norms or to what extent might you be try to provide an overarching frame to guide governance in listing standards generally.
Duncan Niederauer:
I would have thought you were at our last board meeting with that question. That’s a good question. It is something we think a lot about, obviously. If you think about just the activity in the last year and a half or two for the exchange, you’ve got the Euronext merger, you’ve got the Archipelago merger, and you’ve got the pending Amex deal.
All of those marketplaces obviously have listing standards but they’re quite different. So I’ll make a couple of observations:
One, I think if the NYSE had stuck to its historic knitting, we were sending out the message, intentionally or otherwise, that when you are a well-developed, well-established company, give us a call and we’re happy to have you. But if you’re an emerging company go list somewhere else first. Even if you’re a good company, call us when you’re great, we’re not willing to bet on you before you’re great. Last time I checked there are some fairly large companies on other exchanges that I think I’d be hard pressed to call companies like Microsoft with a $300 billion market cap, emerging. I’ve checked the phone records, they haven’t called to list with us yet. So, maybe some day they will but they haven’t yet. So I think what you see us doing is with the Arca platform which, to date has been for some emerging companies and a number of ETFs and Euronext has the Euronext platform and its Alternext platform, which would be analogous to New York and Nasdaq or New York and Arca. Alternext is our European brand for emerging companies. And if you tried to hold those emerging companies to the same standards, obviously very few of them are going to clear the bar, yet the need for them to get to the capital markets is at least as important as a well-established company.
So what we’re doing over time--and this is obviously trying to be done without diluting the NYSE classic brand--is to have different alternatives under the same global brand umbrella for companies of all sizes to find their way somewhere under the umbrella. You will notice that some of the markets we run, they may have different market structures. They may have different standards.
The other thing that you will see us not do is participate in a race to the bottom. None of our listing standards are going to be as low as other places in the world. I don’t think that’s how we want to compete. I think that we take a lot higher risk of dilution. At the same time, we want to say to companies that we think will be great, there’s a place for you to get started with us and we’ve already had some companies migrate from the Arca platform up to NYSE as they got time and experience and a few good quarters of growth under their belt. So I would expect to see us continue to do that operating within the framework I just described.
Thank you.
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