NEW YORK – In 2004, urban theorist Jane Jacobs not only predicted the burst in the real estate bubble, but talked about how it could unwind. In her book Dark Age Ahead, the late Jacobs (best known for her treatise The Death and Life of Great American Cities) took a quite hopeful view of how to avoid a dark age, discussing not only the troubling signs of a decline in civilization, but how to prevent these factors.
One culprit of collapse, Jacobs posits, is when industries and trade groups refuse to police themselves. Throughout history, civilizations have thrived when professional experts regulate themselves through self-imposed codes of conduct. The idea is that while government can regulate physicians, attorneys and accountants, any so-called “profession” elevates itself when its members agree on a code of conduct that prevents fraud and mismanagement and encourages long-term confidence in its standards. Hence our collective frustration at Enron’s accountants and the Catholic Church’s clergy.
At one time, the NYSE was this sort of member body, and its “brand” was synonymous with stability. Even as late as the 1970s, a seat on the exchange commanded enormous respect. That is not the case today. The general public is tired of Wall Street; they no longer trust them. That being said, there is still a reservoir of goodwill for the NYSE as an institution. Any American would still be totally honored to “ring the bell” and would certainly count it as one of their great life experiences.
“When a large order or series of orders comes into electronic markets, they don’t really have any way to recognize either that they’re a mistake or to slow them to down to attract the proper liquidity on the other side.”
Respectfully, we are shocked to hear this response, and we now see how NYSE’s brand is continually being tarnished. The job of the NYSE is precisely to look at trades. Its job is not to run investigations; the job of the NYSE is to set up a system that prevents investigations in the first place in order to protect the investor. NYSE gets to decide how and which and at what volume “orders” come into its system, what traders get to be recognized and what companies get to list. It’s in full control.
The NYSE still commands enormous prestige; a mere listing gives gravitas to a company. That’s why companies like P&G list their stocks there. But the reason the NYSE brand counts is not because it has been around forever and the building is a National Historic Landmark, and folks like to come and ring the bell. NYSE matters because most people believe it stands for something. The brand stands for fair stock trading. And part of “fair” is not just fixing messes after they happen, but preventing accidents before they happen.
I cannot pretend to have the answers as to how to fix this problem, that is the job of NYSE, should it wish to preserve its brand. NYSE has been all over how the SEC will regulate the industry. There are valid concerns there. But the reality is that the main reason why the government is messing about with the exchange is that its self-policing has failed.
NYSE cannot immediately control what happens outside of its exchanges, but it can control what ultimately happens to the stock of the companies that have paid so dearly to be listed with NYSE. The whole idea of the NYSE was to make rules for the trading of the companies that decide to list. But as it is practiced today, the NYSE seems to the public to be some sort of electronic Harrah’s where men of a certain sort get to gamble with their livelihoods. I can only imagine the scene in Cincinnati when all these trading mistakes were not only dragging down the price of P&G’s (PG) stock, but freezing the liquidity of the entire world economy.
The reality is that the NYSE existed for over a century before the advent of the Securities and Exchange Commission. The founders of the NYSE gathered under a buttonwood tree to police themselves, and bring order so that business could thrive. Perhaps the current leadership of the NYSE can find another buttonwood a few blocks away, and figure a way to preserve the nation’s confidence not only in its storied brand, but in capitalism itself.