Is Pine Street about to become Wall Street West?
The Pacific Stock Exchange, the nation's largest stock market center outside Wall Street, is talking to the New York Stock Exchange about a possible merger -- a proposal initiated earlier this year by the NYSE. And while there is no apparent timetable, both sides state that the discussions continue to make progress.
Many industry officials claim that a marriage between the two exchanges would strengthen the position of each partner and advance the possibility of round-the-clock, round-the-world securities trading. But others in the industry suggest this would be a shotgun wedding, forced upon reluctant brokers by foreign competition.
The Pacific Stock Exchange was established in 1957, uniting the San Francisco Stock Exchange, founded in 1882 to provide a market for California mining stocks, and the Los Angeles Oil Exchange, dating from 1899. The exchange has stock trading floors in both cities, but all options trading occurs here.
The Pacific Exchange alternates its corporate headquarters annually between the two cities. Chairman and Chief Executive Officer Charles Rickershauser usually presides over Los Angeles trading. President and Chief Operating Officer Jim Gallagher spends most of his time in San Francisco.
A veteran of the New York Stock Exchange, the 42-year-old Gallagher has been at PSE for four years. In a recent interview, he said that talks with the Big Board were proceeding with "a veneer of difficulty," but that beneath the surface the discussions were going somewhat more smoothly.
The PSE's 516 members, who own the exchange, voted overwhelmingly to pursue merger efforts provided that some guarantees are written into the NYSE proposal. (A two-thirds vote of the membership probably would be required to approve a merger.) However, Gallagher added the cautionary note that dragging the talks on for a protracted period would by itself kill the proposal.
He paraphrased the sentiments expressed at the last membership meeting: "If we are going to give up control [PSE would become a wholly owned subsidiary of a holding company formed by NYSE], what kind of guarantees are we going to get in return that NYSE won't suddenly issue a whole lot more PSE seats [which would dilute their interests], make us change how we trade options to conform with their way, or send New York specialists to take over our specialist posts?"
Under the current NYSE proposal, PSE members would receive a per-seat share of the exchange's net worth -- an estimated $25,000 to $30,000 -- in the form of stock in the holding company. Because the stock is not convertible, the members would be paid off only in the event of liquidation of the NYSE parent company. Moreover, the NYSE would select the majority of board members.
"They would be in control, minus any guarantees they gave us," Gallagher said. "If they wanted to make this Wall Street West, they would have the power and the money to do that."
The NYSE plans to add $20 million to the PSE's $7 million in existing capital over a 10-year period. The funds will go primarily to upgrade the system, including provision for a back-up system in case of power failure. (For example, the two floors now are linked by loudspeaker so the specialists' voices can be heard in both locales.)
Gallagher believes that the NYSE's proposal was spawned by the fear of global competition from people starting to make markets in U.S. securities abroad.
"European exchanges are starting to become more competitive in what we in the United States feel is our product," he said. "And if we are to keep that business, it's my perception that the NYSE feels it will have to open significantly earlier in the morning.
"Although NYSE's ultimate goal is 24-hour trading, its medium-term goal is to open at 7 or 8 a.m. (4 or 5 a.m. Pacific time) to overlap with European trading. PSE, which now opens at 7 a.m. (10 a.m. Eastern time), would take the second shift, opening at least by noon (3 p.m. in the East) and continue to 4 or 5 p.m. (7 or 8 p.m. in the East) so as to overlap with the opening of the Tokyo Stock Exchange."
Gallagher asked: "How do we tell our specialists in NYSE and Amex stocks that our exchange won't be open during the morning trading in New York when trading is heaviest? Members go nuts when you tell them something like that. Alternatively, perhaps we could provide them systems so that even if we are not open, they could reach into the New York market and trade what they consider their stocks."
The big question, according to the San Franciscan, is whether the NYSE can change the life of U.S. brokerage firms by convincing major companies to set up operations to handle trading 16 hours a day and increase productivity at the same time. Institutional brokers on both coasts have indicated their opposition to expanded hours; retail brokers think they may be able to get enough additional business to make it pay.
The Pacific Stock Exchange's average daily stock volume is 5 million shares, compared with 91 million on the Big Board. The PSE trades 58,000 options contracts a day. Eighty percent of its common stocks are NYSE-listed; the others are listed on the American Stock Exchange or are exclusive regional listings. In a merger, the PSE would list the rest of the NYSE stocks, but it is uncertain whether it would have to delist the others that do not meet NYSE standards.
Because the most active NYSE stocks already are traded on the PSE, Gallagher does not expect a huge volume increase. The Los Angeles operations will be moved to a larger building in December, so increased trading would not be a problem anyway.
The price of a PSE seat has doubled recently, mainly as a result of increased options trading, but still it sells for a fraction of the cost of NYSE seats, which have been selling recently for $390,000.
Gallagher admits that, judging by the way everyone followed suit when the Big Board announced it would stay open on Election Day for the first time, its influence probably could induce brokerage firms to have someone on hand to execute a customer's order should hours be expanded. Yet he questions whether a person actually is needed.
Three out of five PSE stock sales already are automatically executed at best prices nationwide through the exchange's computerized Scorex system. Numerous California brokerage firms allow customers to enter orders through personal computers after exchange hours. "If you believe that's the wave of the future," Gallagher said, "then you would want to have a trading mechanism for them."
Yet Gallagher makes clear that he thinks 24-hour trading -- meaning that a customer can buy a stock in the morning in London and sell it at night in Tokyo -- is some time away. He cites the technical hurdle of establishing an international clearing mechanism as well as the legal difficulties of devising comparable regulations in London and Tokyo.
"So far, we haven't even been able to enforce our rules on all people trading in U.S. markets," he noted.