THE NYSE TACKLES THE FUTURE.

The NYSE, an icon for listing and trading shares of the world's most prestigious corporations, takes on today's corporate and competitive challenges from the global, technological, economic and customer arenas.

When it began in 1792, the New York Stock Exchange was virtually "the only guy on the block." In the more than two centuries since its inception, it's become an icon for listing and trading shares of a majority of the world's most prestigious corporations, representing a global market capitalization exceeding $17 trillion. It now lists 2,814 companies, and trades on average, $45 billion daily - with ambitious plans during the next several years to expand the trading capacity from five to 10 times today daily average of 1.2 billion shares.

Now, however, it's not the only guy on the block. And, as a business - like the companies it lists - the NYSE is facing today's business challenges. How it responds to the dynamics of the new competitive forces and market evolution - from the global, technological, economic and customer arenas - will impact its ability to maintain its cachet among those companies aspiring to list on the NYSE.

"While the basic business model has stayed the same, much about the environment and the way things are done - both inside and out - have changed dramatically," says Catherine R. Kinney, since 1995, group executive vice president and a member of the Office of the Chief Executive, one of four executives reporting directly to Chairman and Chief Executive Officer Dick Grasso.

In her current role, Kinney is responsible for competitive positioning and external relationships with the NYSE's many constituents. Since joining the Exchange in 1974, she's held positions in regulation, sales and marketing, technology planning and managing the trading-floor operations and technology.

This varied career has given her a good perspective on the NYSE's multifaceted mission. Kinney outlines the four basic roles: First, helping in the capital-raising process for companies initially going to the public markets. Second, running a very active and liquid secondary market, so that companies in the public space, or those that qualify for listing, benefit from the centralized agency auction market. Third is a regulatory role, making sure that trading is fair to all investors and that members representing investors abide by the Exchange's rules and constitution. In a fourth role, the NYSE serves as a public policy forum where interested parties discuss and debate industry issues.

So, while it's not that competition or change is new to the NYSE - it's been dealing with competitive challenges for quite some time, from exchanges regionally and abroad and (since the 1970s) from the Nasdaq market - what has changed is the nature and dynamics of the competition and the NYSE's response and competitive positioning. For example, new competition is coming from electronic communications networks (ECNs), such as Instinet and Island, though these are not now major rivals.

"There are fundamental changes occurring -- whether that's more and greater use of technology, the introduction of new products, or having our competitive landscape played out on a global stage -- and the Exchange must adapt," says Kinney.

Globalization is clearly one of the major changes in the last five years, as about 10-12 percent of the trading volume comes from non-U.S. companies, indicating a greater desire for raising capital in the U.S. It's expected that, over time, more U.S. investors will want to trade these companies at times other than during the traditional trading hours of 9:30 am to 4:00 pm. With that will come the evolution of a full-scale globalized equities market -- known as "GEM" -- part of which involves trading 24 hours a day. GEM is, Kinney says, "a view that most people have for these markets, and it probably will happen."

The second big change, technology, is key to the Exchange's vision for enabling trading 24 hours a day, both locally and globally. In confirming the NYSE's commitment to technology, Grasso is often quoted as saying: "Technology isn't simply a supportive tool, it's a strategic weapon." Through 2000, the Big Board has spent S2 billion on technology, with similar spending levels likely to occur during the years ahead.

Technology, in fact, is at the core of every initiative of the Exchange's innovations and operations. This includes the many order execution information options provided by the enhanced Network NYSE, newly positioned to make the customer the ultimate beneficiary. Network NYSE is an integrated, global and diverse platform of order-execution services and market information products built on a foundation of sophisticated communications and computing technology designed to create the world's most reliable market infrastructure.

A third change is adapting to the economics of the business. Decimalization, for example, when introduced in 2000, created a basic change for institutions and participants in the market that provide liquidity and take risk. While it's increased trading volume, it represents, nonetheless, a fundamental change that Kinney says was "reasonably well-received by investors, because it's easy to understand."

A fourth change is technology's ability to enable investors to access more information and order execution options. "Whether due to the media feeding the desire, or the ability of the technology itself, investors expect more transparency from the markets, and they want to use technology to execute their orders with speed. But at the same time, they want advisors to help them make decisions," says Kinney. Here, again, the Network NYSE suite of market-information products and order-execution services aims to bring Exchange customers closer to the point-of-sale on the trading floor.

Taking Care of the Business

The NYSE, as a business, grapples with normal corporate and competitive

issues, "As a business, I don't think the Exchange is any different from many of the companies listed on the NYSE," says Kinney. "We operate in a highly regulated environment, but so do many of the listed companies. We're all focused on globalization, technology, productivity and responding to customers' needs. We also focus on pricing, and new products to ensure that we're creating a competitive magnet to attract customer orders to the NYSE; and we compete on the listings front for the secondary market and the interchange of shares."

The NYSE's two main competitive areas are listings and order flow. Competitors for listings are the markets around the world, and primarily Nasdaq in the U.S.; while competition for order flow is coming not only from the other markets, but from the ECNs and the brokerage firms themselves. Recent changes in the NYSE's new listing and marketing strategy that relate to rules, pricing and prospect service are "aggressive," according to an August issue of Grain's New York Business.

Today, companies qualify on financial standards and distribution; for a long time before that, there was an earnings test. Last year, revenue and market cap standards were added, permitting acceptance of companies with $100 million in revenue and $1 billion market cap, even if they had no earnings. NYSE officials took the view that such companies would continue to garner revenue from their products and eventually generate earnings on income statements. Kinney says that more than 40 companies have now been qualified based on the new standards.

Also, a pricing shift now makes it less expensive to bring in new companies or move to the NYSE from other marketplaces. That policy is apparently working, as the NYSE claims a strong year for listing companies transferring from the Nasdaq (as of Aug. 23, 21 companies made the move, and several others are expected). Among those now listing on the Big Board are Sybase Inc., BMC Software Inc., E*Trade Group Inc. and Krispy Kreme Doughnuts Inc., the last of which was Nasdaq's top performing IPO of 2000.

In another competitive move, in February of 1999, the NYSE opened its own Silicon Valley office in Palo Alto, Calif., aiming to communicate its strong focus on technology companies and geographically positioning to provide local personal service for clients and prospects.

As for order flow, basic changes involve new technology - and the Network NYSE program - designed, as Kinney says, "to provide customers or investors what they need to get their business done."

On July 31, the NYSE began trading exchange-traded funds (ETFs) marking a first for making markets in stocks it didn't itself list. "The move to trade ETFs has been perceived as a competitive swipe against the somewhat embattled Amex, whose uncertain trading business has been buoyed in recent years by the large volumes captured by ETFs, a product that exchange actually invented," noted The Wall Street Journal.

Indeed, on its first day of trading the Nasdaq Stock Market's 100 biggest nonfinancial companies, known by its ticker symbol QQQ, the NYSE snagged about 11 percent of the trades executed. Two other Amex-listed ETFs also began trading: the "Spiders" (SPY) that track the Standard & Poor's 500-stock index and the "Diamonds" (DIA) that track the Dow Jones Industrial Average.

Data by late August indicate the NYSE's year-to-date market share for QQQs, SPYs and DIAs were 12 percent, 19 percent and 18 percent, respectively. The NYSE garnered 14 percent across all markets, with daily ranges between 11 percent to 22 percent, or nearly 10 million shares per day.

High Tech Meets Tradition

Despite its reliance on state-of-the-art technology, the NYSE still operates primarily through traditional buyer-seller, face-to-face dealing. Take a walk on the NYSE's trading floor and you'll see the familiar discarded papers, along with today's wireless mobile devices, hand-held or worn on the waists of brokers moving around the famed circular room. Then, walk two rooms over and you'll be transformed into the advanced technology and clean straight lines of the new 8,000-square-foot trading facility, dubbed "the prototype and working laboratory for the future of floor trading." Yet, one shouldn't be fooled by the "look" of the rooms -- there's as much technology working on the "old" floor as the new.

The NYSE's unique business model, the specialist system, is the only one like it in the world. It's a centralized agency auction market model, meaning that it tries to attract as many buyers and sellers in a single location to insure that the price discovery is done with the maximum amount of supply and demand in the marketplace. "Our market share today stands at about 85 percent, so we've been very successful in bringing the maximum amount of order flow in a single location," says Kinney.

The agency auction market model is dependent on buyers and sellers meeting and determining prices based on their meetings -- not always symmetrical or perfect. At such times, the specialist steps in to provide liquidity, or intermittent liquidity, to bridge that supply and demand, Specialists are responsible for an orderly market, are expected to use their capital and never trade ahead of a customer -- always yield to a customer or individual order, and insure that information about trades is out within seconds.

Going Global Challenges

The NYSE is working with nine other exchanges around the world to launch its global equities marketplace, known as GEM. "There is a vision among marketplaces and a desire to share and pool liquidity to insure as much as possible so investors can get the best prices in a much longer or extended period of time," says Kinney. The NYSE is currently determining the feasibility of creating an infrastructure for GEM to enhance liquidity and lower cost, while providing greater transparency to investors worldwide.

Kinney concedes, "It's a complex project, with barriers such as differing regulatory environments, technology challenges and demands and clearance and settlement issues, as each country has its own depositories and requirements for share movement and clearance and settlement."

Other challenges could arise from the move towards converging international accounting standards. While there's no certainty on the outcome of these efforts, at this point, foreign companies seeking capital in the U.S. have to reconcile according to generally accepted accounting principles (GAAP). The NYSE has been successful at capturing the listings of the major corporations - a recent notable (in March) being Siemens AG. Just how the current efforts towards international standards convergence would impact listings isn't known.

Sign 'em Early

The NYSE boasts an aggressive IPO program and, as Kinney says, "IPOs are the lifeblood of the NYSE." She notes that over the past 10 years, the Exchange doubled its listings by adding 1,100 through IPOs. Due to its financial standards and distribution requirements, the NYSE looks at only about 25 percent of the IPO population, and is successful in listing 90 percent from that group --a group that raises 96 percent of the capital among all IPOs. "We get the best and highest-quality IPOs in the world, which also includes carve-outs of our current companies," she adds.

While the overall IPO calendar is slower this year, the NYSE is on a track to come close to, or exceed, last year's totals. As of Aug. 23, the NYSE posted 28 IPOs this year (versus 30 at the same time in 2000 and 43 in 1999). Some of the new big names listing on the Big Board include Accenture Ltd. (formerly Andersen Consulting), Kraft Foods Inc., FMC Technologies Inc. and AT&T Wireless Services Inc., spun off from parent AT&T Corp.

IPOs remain a key to the NYSE's growth and, as Kinney notes, "Our ability to be successful in attracting those [large] IPOs is [going to be] important. That's why we've made some of the rule changes -- because we want to get companies as early as we can, and getting them in the IPO process is most preferable." However, the NYSE's market model doesn't lend itself to every company and, she adds, "We want to make sure there's a balance between our high standards and the companies that we attract."

Adapting to the Changes

Kinney sums up three pressing competitive challenges for the NYSE: "First, continuing to grow in a way that addresses our customers' needs. Second is the constant demand and requirement to adapt with technology to the changing environment. Third is making sure we attract customer order flow and new listings."

She says the NYSE, and the entire industry, have all come a long way. It wasn't too long ago, she argues, when the clearance and settlement process was a paper-and-pencil operation. Now, settlement has gone from five days to three, and the industry goal by 2004 is to be at "T + 1" (one day) for trade and settlement. Kinney's optimistic. "We are a very adaptive industry."