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The NYSE as a symbol of American decline

by Robert Teitelman | Published February 10, 2011 at 11:58 AM

The papers all lead today with the talks between the New York Stock Exchange and the Deutsche Borse. And, given first-day status, there are not a lot of differences in the basic story. But I was drawn to the nut graf that The Wall Street Journal jammed into its piece, particularly its third paragraph: "For New York, the move is symbolic of the city's fading dominance on the world stage as other countries are drawing investors directly to their markets." The paper then moves quickly to undermine that thesis by suggesting that it "also is a recognition" that securities trading is no longer a matter of bricks and mortar, and thus no longer linked to geography. What is going on in this paragraph? Take that first sentence. The WSJ is arguing that New York has faded in dominance, presumably as a financial capital, and that a merger of the NYSE and DB symbolizes it. Now while we're all aware that the financial crisis hit New York hard, and that there's considerable speculation that centers like Hong Kong, Singapore and Shanghai might provide competition to New York, there's been little hard evidence that the city is "fading." For years now, it's been a common theme with every downturn: Tokyo, then Hong Kong, then Frankfurt, then London -- recall the threat of the City producing more IPOs than New York -- then Singapore/Hong Kong/Shanghai were all about to knock Wall Street (a concept larger than just geography anyway) on its ass. And yet it hasn't really happened. Indeed, there's a kind of multiple conflation of concepts going on in this sentence. The NYSE "symbolizes" New York, which in turn represents the United States in its competitive battle with other countries.

And again, after all that symbolizing and representing, the second sentence essentially argues that, given computers and communications technologies, investors can put their money wherever they want. This isn't an elaboration on the first sentence; it's a refutation.

In fact, in that sentence the WSJ is depicting a kind of television or tourism NYSE, where shouting traders on the hallowed marble floor still rule and where the exchange is the vibrant, thumping, physical heart of American capitalism. I can see Dick Grasso now. The reality is so different from that that it's not even funny -- and the Big Board has known it for a number of years, at least since Grasso exited. The exchange for years has been battling competition not just from other equity exchanges, like the Nasdaq, the regionals and the London Stock Exchange, but from exchanges all around the world that trade a variety of instruments far more arcane, but far more profitable, than stocks: notably derivatives and commodities. And more recently, the NYSE and Nasdaq have found themselves competing with a flock of electronic exchanges that keep appearing in waves (under John Thain, the NYSE merged with one of the largest and earliest of those markets, Archipelago). Many of these rivals operate in the United States - in fact, in New Jersey, that foreign power across the Hudson.

Lurking behind that sentence I suspect is the WSJ's attempt to ride the current competitiveness anxieties particularly when it comes to Asia. After all, is there any reason to fear economic warfare with austerity-ridden Brits, symbolized by the LSE, or even the Germans, represented by DB, who have all kinds of pan-European woes to cope with? Or how about those Canadians? No, the implicit Spenglarian logic here is that the NYSE is fading because America is failing and that the West is drawing up its wagons by merging. But if the past history of financial activity is any evidence, this is all blather. Clearly, consolidation has taken place, not just in the exchange world, but among financial capitals. Smaller cities have lost banks. New York's dominance in the U.S. has steadily risen (its only real rival is Chicago), just as London has maintained its dominance in Great Britain and, indeed, Europe. The London case is powerful evidence that a financial capital is more a matter of skills and technology than a hinterland pumping in investor money. What's London's hinterland? The Midlands? London also undercuts the notion that stocks (or IPOs for that matter) run the show. London dominates foreign exchange, which leads to all kinds of other interesting skills. And London undercuts the "ownership" issue as well. There are famously few sizable British-owned firms in the City, which is dominated by American and European banks (although lots of hedge funds, which, like the Greenwich gang, simply want to locate in nice places, often among their peers). And yet the City just keeps keeping on.

The truth is that the new technologies have reduced the dependence on geography and created a ruthlessly competitive global marketplace driven by efficiency, speed and low cost. Liquidity matters, because deep markets generate lower transaction costs; and liquidity tends to attract liquidity. But what we have seen among the exchanges, broadly stated because it's an incredible bestiary of entities, is roughly what we've seen among the banks and firms: The big get bigger (boasting of their liquidity, while pushing technology) while the small proliferate (bragging, for good reason, about their technology and trying to pick up liquidity). The middle has been shredded (which explains Nasdaq's problems). Much the same, I might add, seems to have happened to financial capitals as geographic centers. But in a profoundly decentralized and globalized arena, geography only matters for job creation.

This "barbell" model also shows up in a very different context, John Gapper's discussion of the AOL acquisition of The Huffington Post, in Thursday's Financial Times. I recommend reading Gapper today; it's one of the most sensible analyses of that relatively small, but wildly publicized, deal. Gapper makes the point that "news," however defined, has also undergone that same barbell process, which he associates with money managers in the '90s: There are big generalist sites and outlets and small specialized ones. The broad middle, he argues, is occupied by large regional newspapers (and general-interest magazines, I might add), and they're dying. Increasingly, the two poles operate on different principles. At the top, it's a consumer game, which means chasing traffic, journalism's version of liquidity. At the bottom, it's a matter of producing proprietary content that can be sold to customers who need it; this is the paywall model (and it's one that we at The Deal follow with our Deal Pipeline). At the top you better be big; at the bottom, you better be necessary, which is analogous to having the best technology. Both are difficult to pull off, but the real pain will be felt by those that can't do one or the other -- or that want to do both. Gapper has his doubts about AOL-HuffPo. And you have to wonder about The New York Times and the WSJ, both of which are still trying to bridge those poles.

In news, geography, culture and language still matter, providing some protection from this competition going global. In exchanges, in finance generally, far more of the barriers to globalization have fallen, though regulation and cultural biases remain. What matters increasingly is not where a big marble building is located, but who has the most innovative technology that can attract the greatest liquidity. The NYSE is historically a tangible symbol of America's rise to financial power. But that was over many years ago -- perhaps longer (for a decade, post-'30s, it was a highly regulated utility). It is not a symbol of Wall Street, New York or even American competitiveness any more than a paper called The Wall Street Journal represents the fate of American journalism. - Robert Teitelman

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