[In]Securities Guest Blog: The End of the Line by Aegis Frumento Esq

May 28, 2020

The End of the Line

Colonial Williamsburg began to reopen last week. For now, all you can get is an 18th Century meal served on the cobblestones, but soon, we are told, all its costumed colonial reenactors will be back to show you how to print a broadside or fire a musket. It's alright.

Oh, and this past Tuesday the New York Stock Exchange reopened its famed trading Floor. That's alright too, and in much the same way.

The NYSE Floor had been closed for over two months due to the coronavirus pandemic. But here's the question: Did anyone really notice? 

Go to a chart service and look up the price of, say, IBM common between September 13 and 15, 2001, and tell me what you find. I came with a blank screen. Same with the S&P 500 index and the Dow Jones Average. Look carefully at the charts and you will see price and volume reports for September 10, but the next day is September 17.

The New York Stock Exchange closed the morning of Tuesday, September 11, 2001, before the Open, due to the terrorist attack that destroyed the World Trade Center, and it stayed closed until the following Monday, September 17. During the intervening days, there was no public trading. In the historical charts those days have been erased from the calendar. A day with no trade is, for a trader, not even a day.

Back then, the NYSE trading Floor really did something. It was still the sole geographic locus where Big Board shares efficiently changed hands and official market prices were recorded. No matter where in the world the customer was, his or her broker channeled all orders to buy and sell blue-chip securities to one of the floor brokers on the Floor of the NYSE. 

About a decade earlier, I represented one of those floor brokers. I spent a half-day with him on the floor, just to see how he did his job. It was exhausting! I literally ran after him as he bounded from one to another of the several trading posts that he covered. At each post he would go through the rituals of the "open outcry" trading system -- shouts and hand signals that flew right past me, but that they understood as a bids, asks and trades. The main floor took up half a city block, and right next to it was an additional "New Floor" that was built into an adjacent building. Hanging with my client meant several hours fast-walking the length of a city block over and over. His doctor had warned him he would drop dead of a heart attack if he didn't get a less stressful job -- and in fact I noticed emergency defibrillators located around the Floor. It didn't take much to convince his disability insurer that he had to stop working. 

But that was then. This past Tuesday, Governor Cuomo rang the opening bell and later declared it a symbol of New York turning the corner from the coronavirus lockdown to the renaissance of the City's economy. That would be nice, but from all appearances, that economy still needs a ventilator. It may be some time before it catches its breath, and none of us will breathe easy until the bars and restaurants fill up again. In any event, choosing the NYSE Floor as the symbol of the City's new day was a misstep. The Floor is not the future, but the past quickly receding into history.

In the photos of reopening day, you see a handful of masked traders looking small in that cavernous space, as if they were bandits casing the joint. https://www.businessinsider.com/new-york-stock-exchange-nyse-reopens-trading-floor-masks-pictures-2020-5. And maybe they were. Only a quarter of the usual occupants showed up. The NYSE required everyone to sign a waiver of liability, promising not to sue the Exchange if they caught COVID-19, transmitted it to their family or died of it. Some firms, like Morgan Stanley, said "forget it" and decided to stay away. It hardly mattered.

When the NYSE closed the floor, its trading became exclusively electronic. But the vast majority of stock trading has been electronic for years now anyway. NASDAQ is fully electronic, and even the NYSE automatically routes most of its trades. The floor brokers, like my old client running from post to post, are responsible for less than 10% of all stock trades. That's why, when that percentage fell to zero during the pandemic closure, no one really cared. Look at the stock charts of the past two months. Unlike in September 2001, not a single day is missing. It's been trading as usual. So it was no surprise that most of the crowd that normally gluts the Floor decided they could do as much or more working safely from home in their pajamas. Many may never come back.

So, sorry guv. The NYSE trading Floor is not the future. It's more like the end of the line. 

If you really want a glimpse of the future, look at www.securitize.io. That's the site of a fledgling company dealing in cryptosecurities. It only has three private issuers in its stable right now. On their behalf, it provides all the facilities needed to purchase -- and trade -- privately placed securities. Those securities take the form of smart-contract tokens on the Ethereum blockchain. Once you are vetted as an accredited investor, you have access to offering material, you can electronically sign a subscription agreement, pay your money online, and receive your securities in an Ethereum enabled "wallet." Your securities "know," via their smart contract features, when you are legally able to sell them, and then you are permitted to sell them directly through the blockchain. I got a tour of the entire operation last week. From home in my pajamas.
Securitize is just one very small example, but it is enough to prove the point. What Securitize does with three issuers could be scaled up to be done for hundreds and thousands. Market liquidity and transparency can be had without the added expense of brokers and stock exchanges. That is the future.
Of course, like all those on the cusp of irrelevancy, today's floor brokers claim that the "human touch" is invaluable to steady turbulent markets, and to step in when the computers glitch. https://www.marketplace.org/2020/03/23/nyse-stocks-trading-floor-closed-electronic/. I don't doubt that for a minute. They're doing the best they can. But the 80/20 rule still applies, except here, it's more the 99/1 rule. Perhaps 1% of the time, human floor brokers are helpful. But 99% of the time, a computer can do the same thing without getting winded. NYSE President Stacey Cunningham claimed that the efficiency of floor brokers save "millions of dollars each day."  https://www.wsj.com/articles/the-nyse-will-reopen-the-trading-floor-11589487300. That sounds like a lot, until you consider that the average dollar volume of trades per day in the U.S. stock markets is well over $500 billion. At those levels "millions of dollars"  is a rounding error, bordering on irrelevant.

Still, the romantic in me is happy to see the Floor open again. It reminds me of when it was real, when it mattered. Or, perhaps only of when I was younger. But let's not get carried away by nostalgia. The Floor, today, is more tourist attraction than an essential element of finance. The floor brokers are only a few bounding paces away from being historical reenactors, like Williamsburg's faux-colonials in their tricorne hats. One day, instead of showing tourists how to load a musket, they'll explain the cryptic shouts and hand signals of the trading post. It'll be interesting -- archaic, maybe, but still alright.


Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.