Exchanging Old Ways for New: the Evolution of the NYSE
Shirley Ann Jackson, Ph.D.
President, Rensselaer Polytechnic Institute
WINGS Luncheon - Securities Industry Automation Corporation
New York, New York
Wednesday, March 10, 2004
Good afternoon. Thank you for inviting me to share a moment of Women's History Month with you. Indeed, WINGS is just the sort of organization to which Women's History Month is dedicated — providing a forum for women to inspire each other with hope and with possibility. And, WINGS is evidence that the financial industry has come a long way.
In 1792, a group of 24 prominent men met under the shade of a buttonwood tree not far from here, to form the New York Stock Exchange (NYSE).
There are those who would say that the most important change made in trading methods — in the 200 years following — was that the members moved indoors.
Nevertheless, that can no longer be said. Change is coming rapidly to the New York Stock Exchange, as, indeed, it has already come to financial exchanges around the world.
Change, of course is the operative word, here. Charles Darwin, originator of the theory of evolution, once observed that, "It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."
The New York Stock Exchange is the largest equities market in the world — in effect, the strongest of the species — but, its survival, in the Darwinian sense, nevertheless, depends precisely on its responsiveness to change. The change of which I speak involves technology, of course, and I will address this at greater length shortly, but also, it involves the people to drive and to implement that technology. And, in both respects, you, as information technology professionals — and, as women — are the agents and the leaders of that change. I want to speak to you, today, about your roles, and your responsibilities, in both senses.
Of course, technology has made inroads into traditional trading methods before — from the introduction of the stock ticker in 1867, to the telephone in 1878, to automation of trade and quote data in 1966. But, the contemporary technological era of the New York Stock Exchange began with the creation of Securities Industry Automation Corporation (SIAC), and the computerization of both the New York and American exchanges.
Some of the historical approaches have persisted on the trading floor, however, even as the volume of trades over the SIAC network reaches a trillion dollars a day.
Two recent factors have changed that forever. First, the devastation of the World Trade Center took with it some of our illusions of security — security both of our persons and of our data. The events of September 11, 2001, impressed upon us, deeply, the presence of risk in our lives, and the necessity to deal with risk effectively.
Second, the recent governance issues at the New York Stock Exchange have profoundly affected its future. I came to the NYSE Board of Directors as a result of those governance issues. It has quickly become clear to me, and to others, that automation holds a key to the resolution of many of those issues, through its capacity to increase both the speed and transparency of transactions.
One way in which SIAC has responded to the issue of risk which the interruptions of trading present, either because of natural disaster or because of terrorist acts, its through SFTI, which reduces the likelihood of customer outages. However, as I know you are aware, there are many other types of risks attendant to running a system as extensive, and as pervasive, as the trading systems SIAC administers — with the threat of terrorists making use of cyber weapons in lieu of physical weapons being only one. Cybersecurity is a critical issue, and one where the ground shifts constantly with technological developments.
I see parallels between the perils faced in the cyberworld and in my previous responsibilities as Chairman of the U.S. Nuclear Regulatory Commission. Obviously, the number of potential risks involved in running a complex installation, such as a nuclear plant, is enormous, and, multiplied by 103 nuclear plants in the country with varying strengths and weaknesses, the regulatory task is daunting.
Over decades, a command and control regulatory format had been established which, essentially, tried to anticipate every possible safety vulnerability and to require nuclear plant operators to defend equally against all of them. Operators complied, but the procedural restrictions of compliance hampered plant performance. The industry-average capacity factor — the key rating of plant efficiency — stayed mired, year after year, in the 50 to 60 percent range for the two decades prior to the 1990s.
As NRC Chairman, I initiated, in 1995, a policy of more systematic use of probabilistic risk assessment at the NRC, essentially weighing the probabilities of various events at a nuclear plant and factoring in their potential consequences.We could, then, allocate our regulatory resources toward the more likely, and more safety significant, events, and away from the more remote possibilities, and those with minimal potential for public harm.
This formed the basis for a regimen of risk-informed regulation, incorporating the process of allocating more regulatory resources toward the plants, and activities within plants, that were of the greatest risk significance, and fewer to plants and activities which were exemplary from a risk-ranked perspective.
It is not coincidental, I believe, that since the NRC, under my direction, adopted this more risk-focused, yet flexible regulatory scheme the nuclear industry's average capacity factor has risen above 90 percent for the past several years, and U.S. nuclear plants now rank as the most efficient in the world.
Probabilistic risk assessment can be applied to any industry or sector, including one driven by information technology. I am sure that SIAC is conversant with this strategy, and I will make it a priority of mine during my time on the Board of Directors of the Exchange to facilitate its comprehensive application.
A key difference in the two cases — nuclear energy and the New York Stock Exchange — is that the nuclear industry is trending more toward risk-informed, more flexible regulation, with more self-assessments built in, while the Exchange, having been largely self-regulated for the past 70 years, is now demonstrating the need for a more structured regulatory environment. But, risk assessment, as a part of any regulatory changes, is imperative.
The U.S. Securities and Exchange Commission (SEC) was formed after a period of excess that helped to precipitate the Crash of 1929, and the consequent Depression. At that time, the securities industry moved decisively to clean its own house, earning the right to self-regulate, with ultimate regulatory oversight by the SEC.
Since that time, the industry has grown prodigiously. In the frenzy that surrounded the market prior to the crash of 1929, slightly more than 16 million shares were traded daily. An average day, now, on the New York Stock Exchange sees between one and two billion shares traded. Clearly, the market could not function without the capability SIAC provides.
However, automated trading brings its own perils, as does any automated enterprise — indeed, most change affords its own unique risks.
Certainly, the regulations that have grown up around automated trading on the Exchanges, over the past several decades, confirm the need for regulation to keep pace with technology. It has never been clearer that the Exchange must place a priority on developing and implementing the right information technology (IT) tools for the marketplace to function, and for regulations to work effectively.
And, providing an ultra-secure and reliable infrastructure is not a luxury, but is essential to the preservation of a functioning marketplace in which there is public trust.
Public trust is essential — and, the Exchange, clearly, believes that technology plays a vital role in maintaining that trust.
As recently as last September, The Economist said that, "Perhaps the most glaring lack of innovation in American financial services is in trading equities. The governors of the New York Stock Exchange doggedly refuse to abandon their trading floor entirely — despite the way it now creates market efficiencies for traders to exploit. With NASDAQ having gone completely electronic, and the rise of electronic networks such as Archipelago and Instinet that charge access fees, big market-makers complain about the rise of 'access arbitrage' as market specialists put trades out on the new electronic networks as well as the NYSE, and play market-makers off between the two. Meanwhile, next-day trading — an effort to clear and credit stock market trades more efficiently — remains an IT project for, well, tomorrow."
In response to that concern, last month, the Board of Directors approved a landmark expansion of access to automatic trading at the Exchange. We approved eliminating two of the trading restrictions in the current rules — the 30-second limitation for consecutive orders, and the 1,099-share size limit for orders — and added market orders to those eligible to trade via NYSE Direct+ (i.e. removing the restriction that all Direct+ orders be limit orders).
This expansion of automatic trading is responsive to customers, and will increase both the speed and transparency of trading.
Tomorrow is coming quickly. The Exchange still offers the best prices for its listed equities 93 percent of the time, because of volume and the auction approach, even though, some, as The Economist recently observed, believe "the costs are high." Expanded automatic trading will reduce or eliminate some costs, and will help the Exchange to retain its preeminence as a financial marketplace and to regain its reputation for probity in the future. You, and SIAC, are the keys to that future.
Your leadership role as IT professionals is clear. Also clear is your leadership role, as women. Your cognizance of that role is made manifest by your formation of this organization.
The world's financial exchanges traditionally have been male bastions. No woman owned a seat on the Exchange until Muriel Siebert bought hers in 1967. But clearly, my presence here...and yours — indicates that this is changing — not only in the financial aspects of the exchange, but, also, in the technological aspects, which are your province.
Our presence here today — together — bespeaks a future which we must work together to effect. The scientists and engineers of the future, the information technologists, computer scientists, and innovators of the future, will — indeed, must — come from among young women and minority youth — groups traditionally underrepresented in these fields.
The scientists and engineers of my generation, inspired, as we were, by the space race born when the Soviets launched the first earth orbiting satellite, Sputnik, will soon be eligible to retire. According to the National Science Board's Science and Engineering indicators 2002, the average age of trained scientists and engineers is rising, and retirements will increase dramatically over the next 20 years.
At the same time, fewer and fewer students are choosing to study science. Engineering enrollments are flat. Computer science degrees decreased steadily between 1985 and 1995.
And, yet another factor compounds the mix of forces at work. For years, government and corporate need for specialized science and engineering skills has been filled, when needed, by foreign nationals. But, since September 11th, 2001, visa applications have declined dramatically, and many foreign scientists are finding increased study and work opportunities in their home countries.
This confluence of factors — which I often liken to "The Perfect Storm" — leads us to ask some critical questions: who will do science? Who will be the next generation of scientists and engineers? Who will be the computer scientists and IT specialists we will need to continue the work of SIAC? How will our nation maintain an economy which is driven by the discoveries and innovations of science and technology? And, how will the United States safeguard its homeland without the technologies needed to detect and protect against terrorist threats — physical and cyber?
As an educator, and as the President of the nation's oldest technological research university, I am deeply concerned about the answer to those questions, because they speak directly to our national preeminence and our global leadership.
The answer is that this nation has a great deal of talent available to fill these needs. Only, tomorrow's scientists must and will come from a new cohort of Americans — a "new majority" of Americans — made up of women and minorities — groups underrepresented in the sciences, engineering, mathematics, information sciences, and technologies. These groups now make up nearly two-thirds of the U.S. population.
Women are making big strides in education, medicine, law — and the world of finance — but their advancement in the sciences and technology fields has slowed significantly, and has even eroded. In the early 1980s, women earned nearly 40 percent of the degrees in college level computer studies. Those numbers have diminished to about 20 percent, now. And, overall, less than a fifth of all engineering students are women, while in other fields, such as medicine and law, enrollment has almost reached gender parity.
This must change, and is changing. According to the National Center for Educational Statistics, undergraduate enrollment of women and minority students is increasing faster than that of traditional students, and that percentage will continue to increase.
According to the report, the proportion of majority students dropped by 8.1 percent over the most recent 10-year period. During the same period, enrollment of minority students steadily increased and now makes up about one-third of the student population. One of the major challenges to our education system is to reach out to these students because they are part of the future science and information technology workforce.
Information technology has transformed the financial markets, and that transformation will continue. The data explosion continues. One estimate is that we have increased the total amount of worldwide production of original information by 69 percent in just the last three years. This creates unique challenges in storage, in synthesis, in analysis, in data mining and utility. Distributed sensors, "on demand" computing, the trend toward more and more systems being massively parallel, smart networks, open source software and others are developments in IT already here or on the horizon.
If the United States is to maintain its robust economy and global leadership, we must have the resources — the human resources. And, these human resources must increasingly come from the largest talent pool we have — the ranks of women and minorities.
This is where you come in. Your leadership is essential, as role models to encourage, and to mentor, the young people who follow you. We all must do this. For, if we are to send humans to Mars, or, as a parallel example, to create a truly global, more automated stock exchange — with the right marriage of people and technology — we must have the human resources to make that happen. And, the more diverse this group is, the better, because technological creativity and innovation thrive on diverse perspectives, varied outlooks, and the unique experiences of a variety of cultures and backgrounds.
I have been fortunate enough to serve in all sectors of our economy — in business and industry, in government, and in education, and in all of them, to work to build a better future whether through discovery — by doing research; providing energy — through the safe use of nuclear power; or educating the next generation — by leading a great research university. Through out, I have placed my belief in the future. I a privileged to be in a position to continue to make an investment in that future, as President of Rensselaer Polytechnic Institute, as President of the American Association for the Advancement of Science (AAAS), and in my service on the Board of Directors of the New York Stock Exchange.
These positions allow me to draw upon my background and my interest in technology, in risk and regulation, and in institutional transformation. At the New York Stock Exchange, my interest is at the nexus of risk, regulation, and technology. Where these three come together — their nexus — will play an important role in the future of the Exchange, and how the public perceives the worldís largest and greatest equities market.
I congratulate you for your initiative in forming WINGS, for celebrating Women's History Month, for your attention to the issues that concern women at the Securities Industry Automation Corporation, and for your leadership role in the increasingly essential technological financial arena.
I look forward to interacting with you as we carry out our missions and assist the world's foremost securities marketplace, and center of the financial world, respond positively to the change.
Source citations are available from the division of Strategic Communications and External Relations, Rensselaer Polytechnic Institute. Statistical data contained herein were factually accurate at the time it was delivered. Rensselaer Polytechnic Institute assumes no duty to change it to reflect new developments.