In the stock-exchange business, they are the three men who matter most--Securities and Exchange Commission Chairman Arthur Levitt Jr., New York Stock Exchange Chairman Richard A. Grasso, and Nasdaq Stock Market chief Frank G. Zarb.

Each of these men is taking steps that will radically reshape the U.S. capital markets, ultimately determining the cost and speed of buying and selling stocks. They are part of a business elite who rose to prominence during a wrenching period of Wall Street history, when dozens of firms shut their doors in the late 1960s and early 1970s.

Two of them--Zarb and Levitt--are old friends and business partners who talk to each other frequently. Zarb and Grasso have also known each other for two decades, while Levitt and Grasso were for many years crosstown rivals at competing exchanges.

On Thursday, Grasso persuaded his board of directors to pull down decades-old barriers to harsh competition. The NYSE's garrulous and savvy leader, often described as knowing "when to hold them and when to fold them," counseled retreat in this particular battle, but not surrender. Grasso immediately erected a clever new line of defense that could even be sold as pro-investor. He is asking the SEC to prohibit securities firms from doing trades away from an exchange unless they can offer a better price.

Meanwhile, Zarb has spent recent weeks trying to line up support for an equally radical move. He wants to spin off Nasdaq from its parent, the National Association of Securities Dealers Inc., and turn it into a for-profit entity. The plan he wants the board to approve, possibly as early as Thursday, would give Nasdaq's major players enormous power and potential wealth, but it would leave thousands of smaller members out of the loop. Still, it would make Nasdaq a far tougher and better-run competitor, so the betting is with Zarb.

Behind all these actions is the invisible hand of Levitt. It was Levitt who, in a high-profile speech several weeks ago, signaled to Grasso that Rule 390, which kept competitors from trading key NYSE stocks, had to go. That was followed by private phone calls and quiet public prodding that ended in Thursday's action to drop the restriction.

Likewise, Levitt has let it be known that Nasdaq and the NYSE need to change into for-profit entities to become more competitive. That has helped Zarb convince some Nasdaq fence-sitters that change is inevitable, according to industry sources.

Pushing all three men to the frontiers of this new age of stock exchanges are the Internet entrepreneurs, who are hungrily circling about, some funded by the deep pockets of Wall Street and media companies. For instance, investors in Archipelago, an alternative electronic trading network, include Goldman Sachs Group Inc., J.P. Morgan & Co., Merrill Lynch & Co. and CNBC.

Just as the Internet has reduced the profits of the middlemen in the retail world, so now it is attacking the stock world's middlemen--the stock exchanges. The Internet means that anybody with the right kind of software can display buy and sell orders, making stock exchanges the latest bricks-and-mortar industry under siege by the Internet.

Gerald D. Putnam, the 41-year-old founder, declares that one day Archipelago will rival NYSE and Nasdaq: "I wake up every morning believing that is possible."

Grasso: NYSE Protector

It's a Friday morning on the crowded, boisterous floor of the New York Stock Exchange a few minutes before trading is to begin. A large crowd of traders yelling "What have you got?" has gathered around the trading post of Bryant Yunker Jr. of Spear Leeds & Kellogg, who handles all the trades in International Business Machines Corp. stock.

The day before, IBM had announced surprisingly disappointing earnings, and floor brokers, representing Wall Street firms such as Morgan Stanley, were running up to his desk shouting out their buy and sell orders. Yunker was trying to decide on an opening price that would match buyers and sellers. Tempers flared. A floor official hurried over to try to ensure a fair price and maintain order.

An animated Grasso has brought a visitor here to explain what he sees as the beauty of the NYSE system: All the buyers and sellers come to one person, known as a specialist. The specialist can combine a deep understanding of the trading patterns of the stock with a knowledge of all the orders to keep the market orderly. During the day, the specialists make dozens of decisions that a computer could not, Grasso said.

Smaller orders are routed by computer to the specialist, and in the future they will be executed by computers. But for the larger, more lucrative orders, floor brokers race across the floor and yell out what they want. Specialists match buyers and sellers standing in front of them or trade the stocks themselves, as they scribble the deals by hand.

Wall Street brokerage firms, struggling with plunging commissions, are unhappy about the high costs of having to support an army of floor brokers. Moreover, they would like to keep much of the profits now going to the specialists.

Meanwhile customers argue that many of the most heavily traded stocks could be matched faster and cheaper by computer. "I haven't met a human being that can think faster than a computer chip," said Harold S. Bradley, senior vice president of American Century Investments, which manages mutual funds.

The NYSE is a place steeped stubbornly in the traditions of the past, and for years Grasso has been a staunch defender of its culture. He has worked at the NYSE his whole life and knows many of the highly skilled, well-paid traders who might be put out of work if the NYSE were to go electronic.

So he is navigating a difficult course, trying to move into the electronic, global, highly competitive era fast enough to ward off danger but slow enough to prevent a major shock to the NYSE's inhabitants.

This summer, Grasso declared that the NYSE should go public by Thanksgiving. Switching from a membership structure to a for-profit one would give Grasso the ability to make changes more quickly. The current structure requires him to win a vote of the 1,366 NYSE members.

That plan, however, has been delayed for at least a year. There is internal opposition, according to some, plus concern that a NYSE stock offering might not draw much interest from investors.

Grasso often resorts to fast quips to defuse tension in meetings or deflect controversial questions. But when asked about the public offering, he responds quietly and seriously, with a tortuous answer that perhaps reflects the sensitive internal debate underway.

"I believe the real competitive landscape is not looking at the Nasdaq, the London Stock Exchange or Tokyo Stock Exchange . . . but looking at the data companies," he said. "What this business really does is create a moving stream of data."

That expands the field of potentially damaging competitors to include companies such as Yahoo Inc., Microsoft Corp., E-Trade Securities Inc. or CNBC, or some combination. "If I'm correct that the landscape of competition will be these dramatically different set of names," then a public offering is necessary, Grasso said.

"If I'm wrong about that, then an IPO may or may not be desirable," he said. "But let me say this: A large part of who [our competitors are] will be determined by whether those nontraditional names see an opportunity there."

Zarb: Nasdaq Visionary

In June, Zarb set Japan's financial world buzzing. Just who was that brash, white-haired American who unexpectedly popped into Tokyo and declared to hundreds of cameras and reporters that he would revolutionize Japanese stock trading in one year by setting up a replica of Nasdaq there?

That was the question that several Japanese journalists and Finance Ministry officials posed to Americans in Tokyo. The Japanese were taken aback by his boldness, skeptical of his vision and yet secretly pleased by his plans to bring new sources of funding to Japanese entrepreneurs.

Zarb has that impact on lots of people.

He was President Gerald Ford's energy czar during the Arab oil embargo, leading tough negotiations with the Democrats on Capitol Hill. He took over the reins of a faltering Smith Barney and helped raise its profitability. He oversaw the turnaround of insurance services firm Alexander & Alexander.

Zarb has jumped between Washington and Wall Street, seeming to prefer the role of dealmaker and trailblazer over manager. In the process, he has developed strong ties to men such as Federal Reserve Board Chairman Alan Greenspan and Levitt. During a recent interview, in fact, he fielded a call from Levitt.

In his New York office, the political photos and memorabilia far overwhelm the financial.

He was brought into NASD less than three years ago to shake things up. And he has. Months after he revealed plans for a Nasdaq clone in Japan he unveiled a similar strategy for Europe. Many NASD members remain skeptical of his plans, annoyed at the speed he is moving and yet intrigued by his vision.

His game plan: tap into the pools of capital accumulating in cities such as London and Tokyo. That will draw in more foreign investors in Nasdaq stocks and more foreign-company listings on Nasdaq. That means more business for Nasdaq traders and more revenue for Nasdaq.

Plus, if Nasdaq were able to offer 24-hour trading and easy access to investors around the globe, and to do it before the NYSE, Nasdaq might finally be able to steal some listings from the Big Board. Despite Nasdaq's rapid growth, the stocks that trade there still have a total market value one-third the size of the NYSE.

Zarb is aware that his efforts in Japan and Europe face daunting odds. The risk of failure is high, but if the projects succeed, the payoff will be phenomenal. To those who complain that he is moving recklessly fast, Zarb points to the lessons he learned in the 1960s and 1970s, when the complacent Wall Street firms got battered.

When he started in the securities business, it was a genteel game dominated by "rich Princeton and Yale graduates," he said. "Rich men sold stocks and bonds to other rich men at fixed commissions."

As a poor Hofstra University graduate, he was an outsider in that world. He joined the investment firm Cogan, Berlind, Weill & Levitt, "an itty-bitty company," according to Zarb, whose partners included Levitt and Sanford "Sandy" Weill, now co-chairman of Citigroup. "We were young and risk-takers" and fierce competitors, buying up the blue-blood firms that had dominated the business only a few years before.

"Now, based on the new technology of the Internet, the market is saying: We can find a new way to exchange stocks that is faster and a lot less expensive than the traditional processes. And you stock exchanges--and I'm including Nasdaq in this--either you get it right or we're going to form our own exchanges," Zarb said.

"So here we are, the traditional stock-exchange community, looking at a wave coming toward us," Zarb said. "We're about to go through the biggest changes in 200 years in how stock markets do business."

Levitt: Pushing SEC Goals

Congressional hearings can be disastrous and humbling events for the powerful and brilliant. Some who testify can barely hide their disdain for the questions, especially when they are asked what might be regarded as inane queries from clueless members of Congress.

Levitt, on the other hand, seems to glide through the process.

Elegant, soft-spoken and never defensive, his answers are often preceded by "That's an excellent question, senator." Even when he disagrees with the lawmakers, he seeks a middle ground--"You hit the nail on the head when you said . . ." he begins as he highlights a point of agreement. Afterward he debriefs his staff, to find out how they think the hearings went and to make certain that no parties were unintentionally offended by his testimony.

His predecessor, Richard Breeden, used to draw a line in the sand and fight ferociously for it, said one former SEC lawyer who worked for both Breeden and Levitt. Levitt dislikes that confrontational style, he said, meaning it's difficult to tell how hard the SEC will push for quick and dramatic reforms.

"Arthur won't declare--this is the SEC position, and try to cram it down industry's throat," said another securities industry lawyer in Washington. "Arthur is able to move issues with ambiguous-enough language. . . . Look closely at his speeches. He doesn't really say that the SEC is going to do much. He merely says this is what ought to happen."

Still Levitt, who loves perilous mountain-climbing expeditions, is driven, say former and current staffers. He runs the SEC like a business, with goals and deadlines. He expects loyalty from his staff and closely studies and understands the Machiavellian ways of Washington.

Levitt learned politics at the knee of his father, a popular New York state comptroller for 24 years. Although the state Democratic Party was interested in recruiting the younger Levitt for political office, he declined, instead spending most of his adult life working on Wall Street and serving as chairman of the American Stock Exchange, which has always suffered in the shadow of the far more powerful NYSE. He also owned Roll Call, a newspaper that covers Capitol Hill, before being tapped by President Clinton to head the SEC.

He is one of the few non-lawyers to head the SEC. His choice of causes--such as his crusade for "plain English" in investment literature--puzzles many of Washington's legion of securities lawyers. The SEC issued rules requiring that prospectuses shun legalese and jargon in favor of shorter sentences and better English.

"He thinks more like a reporter than a securities lawyer," one attorney said sarcastically.

Levitt is now embarking on the most critical phase of his tenure as chairman--the transformation of the stock markets. He has already laid out his goals, although not what actions he is willing to take to achieve them or how hard he is willing to push for this ideal.

He wants exchanges to drop rules that block competition, and brokers to stop sending their orders to the firms that pay the most for those orders. He wants to link markets so investors can quickly find the best prices and to eliminate accounting practices that hide problems. He does not want to see individual investors pushed to the end of the line when important stock information is doled out.

Former Treasury secretary Robert E. Rubin, who was once a top Goldman Sachs executive and now is co-chairman of Citigroup, said he basically agrees with Levitt's approach. "The major issue is 'What kind of a market structure do we want in this country?' It seems to me, you want one that encourages competition, avoids fragmentation and is as open as possible to all participants . . . and is effectively regulated," Rubin said.

Levitt has particularly singled out the NYSE, because of the way it dominates U.S. financial markets. His fear: that the NYSE will lose business rapidly if it doesn't reform.

"I think that would be a national economic catastrophe," Levitt said, "and I'm going to do everything I possibly can to see to it that doesn't happen."

In Profile

Arthur Levitt Jr.

Position: Securities and Exchange

Commission chairman since 1993

Age: 68, born in Brooklyn, N.Y.

Education: BA from Williams College, Phi Beta Kappa, 1952

Career highlights: Was a partner in the predecessor firm to Smith, Barney, Shearson; chairman of the American Stock Exchange; chairman of the New York City Economic Development Corp.; owned Roll Call, a newspaper that covers Capitol Hill.

Richard A. Grasso

Position: New York Stock Exchange

chairman since 1995

Age: 53, born in Queens, N.Y.

Education: Attended Pace University;

completed advanced

management program at Harvard Business School in 1985.

Career highlights: Joined the NYSE as a staff member in 1968 and has moved up the ranks to become the exchange's chairman.

Frank G. ZarbPosition: National Association of

Securities Dealers chairman since 1997

Age: 64, born in Brooklyn, N.Y.

Education: BA in 1957, MBA in 1962, both from Hofstra University

Career highlights:

Various assignments in five administrations including assistant to the president for energy affairs, associate director of the Office of Management and Budget and assistant secretary of labor; was chairman and CEO of Smith Barney, a unit of Travelers Inc., and a vice chairman of Travelers.

SOURCES: Who's Who, Bloomberg News, SEC, NYSE, NASD

Two Major Markets


The New York Stock Exchange, a 36,000-square-foot facility located in Manhattan, operates like an auction. Open bids and offers are shouted out by NYSE members acting on behalf of institutions and individual investors. Buy and sell orders for each listed security meet directly on the trading floor in assigned locations. Every listed security is traded in a unique location, near one of the floor's 17 trading posts.


Nasdaq was the world's first electronic market. Trading is through an open-market, multiple-dealer system, with many market makers competing to handle transactions in an individual stock. Unlike traditional floor-based stock markets, Nasdaq has no single specialist through which transactions pass. Since 1992, its securities have been traded in the early- morning hours, when the London markets are open.

NYSE Nasdaq

Date established 1792 1971

Chairman Richard A. Grasso Frank G. Zarb

Total market cap of

listed stocks $11.1 trillion $3.7 trillion

(as of 10/29) (as of 10/31)

Number of stocks 3,042 (as of 11/30) 5,252* (as of 10/31)

Annual share volume

(1998) 170 billion 202.0 billion

Share of value of

all publicly owned

companies 75% (as of 10/31) 19% (as of 10/31)

SOURCES: New York Stock Exchange, Nasdaq