Securities and Exchange Commission Historical Society

The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792-2010

A Quiet Revolution

Reorganizing the NYSE

"I think John [Thain] had the brilliant stroke of doing that merger because it got us public in a stroke of a pen as opposed to the agony that it would've taken. It was already hard, but otherwise it would've been almost impossible."

- November 5, 2009 Interview with Catherine Kinney

In the mid-1990s the odd-eighths scandal had opened the way for big changes at the NASD. In the mid-2000s the specialist scandal and the Grasso flap provided a similar opportunity at the NYSE. John Thain, who became NYSE CEO in early 2004, began laying plans for a wholesale transformation of the venerable exchange.

Archipelago Electronic Communications Network was one of the first ECNs, founded in 1996. In 2002, Archipelago and the Pacific Exchange had created the Archipelago Exchange (ArcaEx). ECNs had been private; ArcaEx was the first open all-electronic exchange. It went public in 2004 and within a year was trading 700 million shares a day. In April 2005 the NYSE and ArcaEx announced a merger. Two days later, Nasdaq announced the purchase of electronic trading pioneer Instinet. It was a new world on Wall Street.113

In March 2006, as part of its purchase of ArcaEx, the NYSE was demutualized and went public. The for-profit NYSE Group became the parent of the exchange and ArcaEx. SEC approval of this sweeping transformation had been contingent upon further governance changes at the NYSE. A not-for-profit subsidiary, NYSE Regulation, was established, with the majority of its board independent of the NYSE. The chief regulatory officer's independence was assured by making the NYSE Regulation board his only direct report. With five divisions covering company compliance, member firm regulation, market surveillance, and enforcement and dispute resolution, as well as a risk assessment unit, NYSE Regulation employed about 750 people at mid-decade.114

In April 2007, Thain realized Grasso's dream of globalization by merging with Euronext to create the first truly world-wide exchange group covering seven markets in six countries. The once bustling NYSE floor had meanwhile grown quiet as electronic trading took over. Direct+ had moved beyond pilot status. By late 2005, it handled 11.4 percent of all NYSE business. The next year, the "Hybrid Market" initiative, designed to combine auction-based trading with electronic trading and to comply with Reg NMS, was approved by the SEC. In October 2008, NYSE Euronext bought the AMEX, making it the nation's third largest options market. Perhaps the most decisive break with the past came when, in October 2008, exchange specialists became a thing of the past, replaced by "Designated Market Makers."  It was a semantic, but symbolic, change.115

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(113.) NYSE Annual Report, 2005; "Nasdaq Buys Instinet Electronic Trading Arm,", April 22, 2005

(114.) NYSE Annual Report, 2005; NYSE 10K Report, 2006.

(115.) NYSE 10K Report, 2006; NYSE Annual Report, 2005.

Related Museum Resources

Oral Histories

05 November 2009

Catherine Kinney

17 November 2009

Robert Marchman

03 December 2009

Donald Stone

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