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Stephen Dunphy / Times staff columnist
Economic Memo: Big changes on the Big Board

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I've been to the New York Stock Exchange a dozen times over the years as business and family have brought me to Manhattan. I always try to stop at the exchange, sometimes just watching and listening from the visitors' gallery, sometimes walking around among the traders.

It's kind of a touchstone for me, a place I can go to feel the power and drama of the business world. It's a place to watch the mergers and acquisitions, the profits and losses, the rising stars and the fading has-beens.

But the exchange is under fire these days, with some of its long-standing traditions challenged and a messy pay scandal involving its former chairman, Richard Grasso.

The exchange floor is divided into several areas: the main area; a side room called the Garage; another called the Blue Room. I spent some time this week with a specialist in the Blue Room. A specialist is responsible for the orderly buying and selling of certain stocks, using shares from his own portfolio to meet demand or soaking up unwanted shares.

The exchange and the Securities and Exchange Commission are investigating charges of specialists placing orders for their own accounts in front of big buy orders because the price will rise. Easy profits for an insider, or so the charge goes.

I talked with this specialist about his trade and the pressure on the industry. Because of all the questions, he requested his name not be used.

He doesn't like the charges. "If people were doing things they shouldn't, let's get them out of here," he said. "Haul them off."

Do specialists have an advantage? Sure, he said. "I have a feel for the market. I see the order flow. I have my own research," he said, pulling up a chart on a screen showing a trading range for the stock he covers. But, he said it does not mean he can take advantage of it.

"I also provide that information to the market," he said. As if to illustrate his point, trading in one of his stocks picks up. Brokers come by asking what is happening. "Morgan sold 50 earlier, but did not come back," the specialist said. "Not much activity. Market's at 70-72."

Translation? Morgan Stanley, a major market player, sold 50,000 shares of the stock earlier in the day, but that was all. They did not come back and sell more. Trading in the stock is light. The price is between $24.70 and $24.72, the dollar value already known and meaningless in this context. The quote is 70-72, the pennies that separate buyers and sellers.

The specialist, admittedly under fire, will insist trading with him and his colleagues makes the stock price more competitive than it would otherwise be.

In addition to the continuing human element that people call old-fashioned, the exchange is getting more electronic every day. New hand-held computers make trading quicker and easier. Automated systems also execute trades. The specialist is involved in only about 18 percent of trades.

In another part of the floor, a broker sees things much the same way. He is buying Ford stock this day as the price begins to move higher. He makes some trades electronically, some with the specialists as other brokers are attracted to the price movement.

I asked him why the specialist is so important. Why is the NYSE the place to be? Most small investors really don't care where their stock is bought or sold, they just want a good price. Does a penny or two make that much difference?

"It helps you know it's a good price," he said. "That small a difference means to me that there is something behind that price, something backing it up, someone who is paying attention."

The "street" is more than the NYSE, of course. It is a critical mass of busy trading floors, electronic market gurus, brokers and clerks who together form the financial heart of the country.

What happens here is important. No matter how arcane they might seem, stocks and bonds play a big part of all our lives — no matter whether we own a single share. If you have a pension fund at work, for instance, much of that money is being invested in the market.

The other major player in this world is Nasdaq, which started informally in the 1930s as brokers bought and sold smaller companies' stocks literally over the counter.

Today it's an electronic market that rivals — and at times surpasses — the NYSE in size, with a computer-based "national market system." By the way, Nasdaq stands for the National Association of Securities Dealers Automated Quotation system.

Most people in the industry feel there is a place for the different ways of trading. The NYSE, Nasdaq and electronic systems create a financial industry that is the largest, fairest, most competitive and liquid (it's easy to buy and sell) in the world.

John Reed, interim NYSE chairman, pulls no punches when he talks about the problems. In a speech earlier this month to the securities industry, he said Wall Street firms are not held in high regard.

"We have lost a tremendous reputation and it hurts the country and it hurts the economy," Reed said. "We have been told to clean up our act."

The SEC increasingly is involved in the question and is likely to impose some rule changes of its own in the months ahead.

I hope the rules don't end the specialist system or fundamentally change the NYSE. There is something cold and impersonal about a completely electronic market. And given human nature, someone will find a way to exploit it anyway.

The NYSE is like baseball. The rules may not always make sense and they are sometimes unfair. Sometimes the umpires blow one, but it all evens out in the end. Like baseball, the exchange has always been there.

It handled the big crashes of the past as well as any electronic system — some would argue the human element made the exchange better than the electronic ones when it came to adversity. When the exchange started trading again after the Sept. 11, 2001, attacks, it was one of the big signs that the terrorists had failed in their ultimate goal.

The streets around the exchange are torn up now. Jackhammers pound away on the old asphalt. In some places, the intricate innards of the pipes and wiring under the street lie exposed. But soon new pavement will be put down and the streets will be smooth again.

Not a bad analogy for what's happening inside the imposing building — and institution — at Broad and Wall Street.

Stephen H. Dunphy's phone: 206-464-2365. Fax: 206-382-8879. E-mail: sdunphy@seattletimes.com. More columns at www.seattletimes.com/columnists

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