(00:00:00) I'm Jack macfarland chairman of inter-regional Financial Group and a member of the board of directors of Minnesota meeting broadcast of Minnesota meeting are made possible by the law firm of Oppenheimer wolf and Donnelly Minnesota meeting as many of you know is a public affairs Forum which brings National and international speakers to Minnesota the u.s. Capital markets and our ability to raise funds is a tremendously valuable National Asset and I believe the Envy of the rest of the world at the center of this system is the New York Stock Exchange and the liquidity that it provides we have with us today the new as of January first chairman and chief executive officer of the New York Stock Exchange bill Donaldson. I think it is a tremendous credit to The Exchange and particularly to this young man right here in front of me Clark Westco who is a member of the board of directors of the New York Stock Exchange that they Bill Donelson to take over the leadership as of January 1 I believe he is the right man at the right time for a very difficult job Bill started his career with a firm called Donaldson Lufkin & jenrette Bill and two of his associates associate started this firm in 1959, and they had the vision to realize that the institutional Marketplace would become a significant factor in capital formation and that firm it today is still one of the most successful. I came back from Washington this morning after attending an SI a board meeting and on the airplane, I wrote down some of the issues that I think bill and his associates are going to have to deal with I did not share those with him, but I did tell him that I was going to do this but these are the issues that I think that I'm some of which I'm sure he will address number one is the growing power and the dominance of institutional investors today institutions on Percent of all public equity and they account for approximately 70% of the transactions on the exchange. This is not necessarily good or bad. It's a fact the increased volatility of the market a hundred points wings today, as you all know are commonplace. The Flight of the individual investors individual investors have been net sellers of Securities nine out of the last ten years the globalization of the market. There is competition today from London from from Tokyo. And from Hong Kong it is it is literally true that you can trade Securities 24 hours a day. The growth in the derivative Equity products options and Futures which are traded in Chicago many of which are traded in Chicago and finally The credibility and image of the Securities industry junk bonds leveraged buyouts insider trading has certainly not created AKA sense of confidence of the public in our market system. So these are some of the issues that that bill and his associates are going to deal with it is a real privilege and pleasure for us to be able to have you here in Minnesota. And please everyone join me in welcoming the chairman and chief executive officer of the New York Stock Exchange bill Donaldson. (00:03:25) I think I'm going to sit down dick. And then let you elaborate on the solutions to all those problems who stole all of my thunder here you gave my speech, you know, I'm delighted to be back here in Minnesota and particularly in Minneapolis and to see so many old friends that I haven't seen for a long time. I was reminiscing this morning with some people over at IDs. I said next to Jean sit here who many years ago was add IDs when we started our business and Bill Dudley sitting over there. I remember coming here as a young man with hat in hand with my young Partners to see what our this monster IDs would deign to do business with a couple of young kids decided to start a firm and believe it or not. They did do business with us for which we are forever grateful. I think that my understanding is that you have a question and answer format here and maybe dick some of the questions that you brought up or things you would like to dwell on so I'd like to get to that Q&A and talk about what you all would like to talk about as quick as he can but I will start off by just listing a few things that are on my mind as I take over this job, which is Dick implies is a job that is got one or two problems associated with it. It is for me a real honor to be asked to speak at this forum. I'm tremendously impressed with what you've put together here over the last nine years and I think groups like this are so important to keep the country going if you will by constantly evaluating and talking about some of the problems and although the problems of our Central Marketplace seem too pale with some of the things we've been dealing with in the last few months in the Far East. They are nonetheless extremely important. We have been through I think one of those singular moments in history when we're all kind of drawn together and it renews our faith and what we really can't Appalachian terms of a national purpose and while we talk about our problems is a national and sort of Social and economic thing. We've once again in my view demonstrated our incredible ability to get things done. Now if we can only apply that focus and determination and organization to some of the business and economic problems that are facing us. It's just seems obvious to me that our competitive position in this shrinking world is going to be just as strong as we resolve to make it and that's really the context that I'd like to talk to you in this afternoon. I'm sure that some of you would rather have me talk about what the stock market is going to do tomorrow or today and I have to confess that I haven't the faintest idea. I had no more idea today than I had 30 years ago. I'm going to leave that to the market analysts. I was a market Analyst at one point and I was always very glad when people forgot what Had to say what what I'd like to focus on is some more fundamental matters and things that really pertain directly to our ability to maintain and build the economic strength and a play are proper role in a global setting obviously. What's far more important than the Dow Jones average today as tomorrow's shape of the US equities Market is Dick and plied the question is how best to preserve and enhance the distinct competitive advantage that we've gained from our Central auction Market way of pricing Securities and from the chief practitioner of that auction market system the New York Stock Exchange. I'd like to begin by saying that we got to try to understand the combination of diversity and professionalism and advanced technology that makes our auction market so much better than other systems in the world as dickon plaid our Market is the Envy of other Market systems in the world. Old then I think we can examine what we should do to go on and build on that strength that's been built over the last couple of hundred years. I think the I would classify the response to what can we do under sort of two categories one is globalization and the need to move as quickly as we can to unshackle our markets from the outdated rules so that we can be assured of continued leadership on a world scene and I'll come back to that in a second. And secondly, I think we've got to make certain that we have a market that meets the investment needs of the broadest base of investors from the largest to the very smallest that includes dealing directly with individual investor concerns about volatility and the changing patterns of trading in today's marketplace now. I hope you won't at least for a few minutes consider these issues solely Wall Street problems because as far as I'm concerned the market really belongs to all of us. Weather is individual investors as participants in retirement programs as business people seeking capital or managing investment funds or as Regulators charged with maintaining a market that is fair to all of those constituencies. I asked for the moment that you be willing to think of me not just as the new chairman of the New York Stock Exchange, but as a representative of all of those interests and stakeholders in this Central auction Market process because that's how I view my job these Equity markets play a central role in the economy over the years their liquidity and absolutely unique self regulatory mechanisms have provided a repository for Savings of the nation and an unparalleled source of capital for all of our corporations many of our corporations and for the entrepreneurs in his country at the core of the markets is the dominant auction Market the New York Stock Exchange a hundred and ninety nine years old. We're nearly 1,800. Of our nation's largest corporations have chosen to have their stocks listed that includes 44 companies located here in Minnesota and incidentally that ranks Minnesota a solid number 10 in terms of companies located here listed on the New York Stock Exchange what we've learned over this nearly 200 years. Is it the most effective market? And the most liquid one is the one that brings together the maximum number of buyers and sellers in a central system. It is a market that brings those participants together in a public and highly competitive auction process where price negotiation is conducted in a totally open environment a market where customers know that when the transaction is completed they've gotten the best possible price because they've been given access to such a broad range of interested buyers and sellers. It's a customer driven Market where buy and sell orders could meet directly as opposed to a dealer driven. We're a dealer sets. The price we're customers may be left in that dealer Market with some lingering question about what are the price that they were offered was absolutely the best one available on that day. It's a market with tremendously sophisticated technology for order delivery and for full and nearly instantaneous reporting and recording of all the transactions. We've also learned that an effective Market imposes those regulatory measures necessary to ensure that trading is fair and open and some of the best Market is one that combines the most advanced technology with the skills and judgments of professionals representing the public now, we committed ourselves as a country to this kind of a market a long time ago. And as a result, I think of this auction process we have a vast and extremely diverse community of people owning stocks. In fact some 50 million people in this country own. Socks directly and if you add into that the indirect ownership through things such as Retirement plans three out of five Americans are either directly or indirectly involved in our stock market. So as an important place that diversity is one of the main factors that differentiates our market for markets elsewhere in the world where the public has had much less participation in stock ownership at present the New York. Stock Exchange is a strong auction Market we account today for some 85 percent of the value of trading in stocks listed on that exchange. We also have a competitive structure that's been put together in the last 15 years that involves Regional stock exchanges all tied together in an inner market system that provides access to the best price and any one of these markets that system like any other has its flaws, but it is a carefully balanced structure at Some concept that is served investors. Well as provided incentives for the individual markets themselves around the country to improve their service and increase their efficiency as an active participant in that market long before taking this current job. I can say without hesitation that no other system serves investors as well not electronic dealer markets that serve only a segment of the investor population and sidestep the public Spotlight and the full regulation and the full competitive auction pricing and complete public disclosure that the auction Market represents not internalized trading inside investment firms were a dealer makes his own Market without exposing those orders to the external buyers and sellers that may be out there not foreign markets where there's less liquidity a lot less public participation and a whole lot less regulation those Tickets in their own way have ultimately effective of fencing off groups of investors and depriving them of the large institution as well as a small individual who wants to buy a hundred shares of the benefits of the fully competitive auction system dealing in one of those limited access markets is roughly analogous. I think to going into one shop to buy some sort of an expensive item without having the facility or the ability to go around and comparison shop and make sure you're getting the best deal is available at day. If you contrast that with our auction Market where buyers and sellers from all over the world through their representatives come together to trade with each other. If a buyer can find a seller and agree upon a price in that auction environment. The transaction takes place without anybody in between in the dealer in our Market the dealer we call a Simply steps aside in 90% of the transactions on the New York Stock Exchange natural buyers meet natural sellers in that auction process in 30% of the time the auction process is going on in the marketplace results in price approvement for someone who has a limited order they get a better price than they were looking for. Now if customers cannot get together on a price and agree then our Specialists step in and those Specialists have two related obligations. The first is to make a continuous Market if buyers and sellers are apart on price The Specialist has the obligation to use his Capital to make a continuous Market to make a bid and offer but he has a second obligation, which is that he cannot put himself he or she cannot put herself or himself ahead of a public investor in other words if there's a public order with a better bitter offer the special Steps back and let's that operate in the marketplace. I believe this system with the specialist is with those obligations is vital to the auction market and is as opposed to the dealer Market where the dealer has both sides of every trade and is allowed to step ahead of the public if you let me get maybe down a little too much in detail just to explain this a little further. Let's let's let's suppose that that a dealer is offering to buy stock at $40 a share and he's offering to sell it the 40 and a half. So if we say the bid is 40 and he offers 40 and a half if the dealer has public offers he has no obligation to execute those orders in between that bid and ask you sell to him at the bid you buy from him at the ask and and hopefully he makes a profit in between in an auction Market public buyers meet public sellers so that even if somebody is out there and wants to pay 40 in a Preferred stock and somebody is willing to sell it for you to court. They can find themselves in an auction market and transact at 40 and a quarter with that half point spread going to the buyer and the seller as opposed to the intermediary and I've over simplified that but that's what we're talking about when we talk about an auction Market versus a dealer Market. Now people individuals and organizations have come along from time to time and now in increasing numbers claiming that they can provide a better mechanism than that and to the extent that they can succeed in convincing people there lessening and not increasing that pricing competition that makes our Central Marketplace. So strong if the auction Market losses business because customers are generally better served elsewhere and are getting better prices. So be it we've got to improve the auction system. But if the central Marketplace losses as a result of loss of focus on the End customer or because of some Shortcut around this competitive pricing and Market access and total disclosure, then we're on a road to losing the balance and integrity that we so carefully built into this Market over the last several hundred years. Now this discussion of an auction Market leads me directly to the competitive strength of our Equity markets on a global scene and dick you mentioned. National side of what we're doing strong National markets complete compete the best internationally. In fact, we see in a world today a movement toward centralization of markets. The best example is what seems to be eventually going to come out of European community and Confederation and Western Europe and much more closer affiliation of those markets at the same time. If our nation is going to compete effectively in these International Arena, we've got to think about our Equity markets more in international Global terms 20 years ago our nation accounted for about two-thirds of all the capitalization of publicly traded companies in this country in the world today with so many strong economy zelcer. We have less than a third. We estimate that there are more than 2,000 companies outside the United States which meet the New York Stock Exchange Financial criteria in terms of number of shareholders in terms of earning power and so forth. The you that mm could be considered world-class companies currently among our 1800 listed companies only 100 are non us and there's a reason for that it's because we're obliged by federal regulations to hold any foreign company wishing to list its shares in this country to our public accounting auditing disclosure and Reporting standards. That's true. No matter how successful that company is or how well regulated. The company is in its Home Market meeting two different standards for a foreign company is an extremely costly proposition in terms of reconciling their accounting and discourages the great bulk of these foreign companies from being listed here in the United States. The Paradox is that the American investors already have a sizable stake in foreign companies directly or more often now through mutual funds those Holdings reached 91 billion dollars at the end of 1989. And that was some 13 billion added to the figure just In 1989, that's six times what they were a decade ago. As far as I'm concerned, there's not much point in being inflexible on accounting standards and thereby forcing investors to go outside the best regulated market to buy foreign shares because surely that's what's going to happen. They're going to go outside into foreign markets with all the inefficiency in the layering of cost that that involves in the name of protecting our investors from an accounting standards. What I'm suggesting that is that we and our regulators and if necessary Congress find a way to at least Begin by listing 300 or so of these world-class companies on the New York Stock Exchange right now as a first step in a more General regulatory revision, by the way, the median market capitalization of those 300 companies exceeds 4 billion dollars, which is compared with a 350 million dollar average median capitalization for stocks currently listed on. York Exchange investors in my plan would be advised that those equities are trading under a rule exemption and that accompanies abide by Home Country standards. The alternative is to sit back and wait until we develop some sort of International Accounting Standards are till we convince these foreign companies the Deutsche Bank for instance that they Auto Account like American Banks. That's a tough sale is an expensive sale. I'm not holding my breath until it happens. Now there's another important aspect to this whole Global aspect of what we're doing and that is that we've got to maintain a full diversity of participation. The auction process individuals are vital part of that. We've got to overcome the reality and if it's not a reality that's a perception that the market is no longer a good place for them part of that is remaining in the markets may go through individual days with sharp price fluctuations and may rise and fall with business Cycles. But over the Long Haul on average no major marketable asset class has done as well as Common Stocks the compound annual rate of return on the SP average is averaged over twist just under 12% over 40 year period if you want to go back even further than that, you get the same sort of number even more interesting to me that is that over 90 years stocks Total return on stocks. Then about twice what Total return on bonds have been an even more important three times inflation during that 90 year period so the idea of buying solid companies and holding them for the Long Haul as an idea that we've got to remind people about still the short term activity is kind of nerve-racking for an awful lot of people. So the New York Stock Exchange has taken a number of steps to try and deal with investor concerns about Market volatility and one of its perceived causes program trading and especially in the form of what we call index Arbitrage. I won't bore you with the archana's of this and I'm sure those in the room who understand it better than I programmed for 80 simply means a simultaneous buying or selling of groups of stocks rather than just individual issues and index Arbitrage is a little bit more complicated. It involves a number of different sorts of instruments stocks and Options and indexes on Futures and souls for traded in very large quantities often. It's blinding speed the point here is to exploit small discrepancies and prices between different but related markets much of the time and this is hard to get across let some of that trading adds to the liquidity in the market place. And basically we want that liquidity. It's necessary for to have the market function as it does but in too many situations, it appears to create unnecessary volatility in prices in response to that what the New York Stock Exchange has tried to do is to come up with a system that a number of actions that that attempt to mitigate the undue influence of this sort of trading first. We've established a thing called the individual investor express delivery service II EDS and what that means is that no matter how heavy the flow of orders on a busy day program Trading. Otherwise an individual's Market order for a hundred shares will go to the head of the line to be executed with the largest institution in the world. So the individual is not backed up behind an institution trying to buy or sell at the same price. We've also put in place a series of rules that put restrictions on index Arbitrage orders when the market goes up 50 points or down 50 points those index Arbitrage orders must move back and move counter to the market. So they don't become a self-fulfilling prophecy. If you will and feed on themselves that new rule has been triggered some two dozen times since last summer when it was put in was triggered yesterday when the market was down over 60 points in my view. It is added considerably to a dampening down of the volatility that would have been there particularly in the unsettled times that we've had in the last several months. Over the past decade we've also added significantly to our surveillance and enforcement activities to make the market a place where investors of all kind can trade with confidence today. When our stock watch computers tell us that something may be a Miss. We have databases that enable us to track the activity and to identify exactly who was involved and why they're involved we've recently added a dimension of artificial intelligence to that to just dramatically increase the speed with which our investigators can get to and analyze such information the New York Stock Exchange has spent over six hundred million dollars over the last decade to make this Market the most advanced in the world our technology permits us to receive transact and report back these orders electronically anywhere in the world in 28 seconds still. I'm the first to say that we're not perfect that we can like any other system. We can improve it. We were going to work at improving it. I want to assure you and a lot Other people across this country that we're going to be working very hard to improve and adopt our system the changes that are taking place. We have an obligation as far as I'm concerned to be as efficient as we possibly can and to manage our own institution a New York Stock Exchange itself as a company in a way that the cost savings can be invested in new technology and or passed on to create a lower cost of access to the people who use our system. Now part of the accelerating change is a massive growth as dick mentioned and funds under institutional management, especially Pension funds and rapidly involving new investment strategies and techniques and trading practices the people responsible for investing that institutional money including money on which many of you in this room will ultimately retire are feeling increasing pressure from some of their sponsors to produce short-term gains and some cases that pressure is coming from Leaders who espouse the virtue of long-term strategy one minute and our own business and fire a fund manager for four quarters performance the next as a result an increasing number of these fund managers have abandoned the idea of picking individual stocks instead of seeking values in a market. They've devised complex techniques to stay just even with the overall market and maybe eke out a few extra basis points in the current quarter a parlance of the trade that's called index investing with total pension fund assets growing twice the rate of our gross national product. The funds could reach or have reach four trillion will reach 4 trillion by the year 2000 they could own half of all corporate equity in this country. Just the Pension funds alone and one of the problems with this size and some of these new trading strategies is that they can lead us in my view toward less diversity in a market and the increasing commoditization of in Visual equities going out and trading them in mass in baskets, like undifferentiated soybeans or pork bellies passive investing just matching the market means making no effort to judge the value of individual businesses and yet as far as I'm concerned, that's the main asset allocation function of an equities Market. I don't have a lot of answers to some of these Trends but I do think it's time for all of us in this room and across the country for everyone concerned to start thinking about the impact of these tactics which are being used to affect short-term Advantage for pension assets and particular set aside to meet long-term liabilities. If we come back just for one second to that individual investor with so many of the professional money managers out there taken the attitude that I'm just going to be average. There's no good reason as far as I'm concerned for the individual to be timid about competing. With them to quote Pete Lynch the former Magellan wizard. He said dumb money is only dumb when it listens to the smart money. Trying to compete as a day trader is a lot more risky as far as I'm concerned and picking companies likely to succeed over the long term and sticking with them and the long-term results of equities as a group show that that statement is true. My intent really is to enlist your interest in this Marketplace. I haven't I hope gotten too detailed in talking about it. It's got to be a market that that offers the best of the world in terms of investment opportunities foreign companies and American companies. It's got to be a market that carefully accommodates but balances all the diverse investment goals and strategies while preventing any single class of investor from Gaining advantage over another by virtue of his size or technological advantage Peter Drucker tells us that economic results are not produced by economic forces. They are produced by human. Achievement we have in this auction markets something that is Dick said is the Envy of the rest of the world. We've got to have the imagination and the flexibility to protect this National Asset and to take the further steps necessary to achieve a new level of Global Leadership. I'll stop there and I would be delighted to take any questions or hear any statements if there are any thank you. Mr. Donaldson. We have a first question here from Bill Hogan. Hi Phil, Hogan. You talked about inviting foreign investment and trading with a rule exemption. Might that not cause some improprieties in the market. (00:31:03) Do you worry about regulations with that sort of trading? (00:31:06) Well, that's a good question. There's a there's a trade-off here and there's a paradox that the Paradox is that that in the name of making foreign companies conform to our accounting standards. We are supposedly protecting investors on the other hand by allowing investors to go around our Marketplace and trade and less regulated markets were adding considerably to their costs and we're forcing them to trade in markets that don't have anywhere near the regulation that we have. So it seems to me that we've got to reach a compromise. It isn't that the Deutsche Bank to use them again as an example is basically that difficult to understand. I mean they show on their balance sheet. Ownership in other companies and they just don't want to have to flow that through their profit and loss statement. But any analyst can take and measure what the value of their assets is most analysts that are serving investors today are becoming increasingly familiar with International Accounting Standards. And my feeling is that that we've got to get started that that if we wait until we get uniformity of accounting or get foreign companies to account on us standards will never trade these companies, but that won't prevent American buyers from buying those company. They'll just buy them or inefficiently. Thank you. We have a question here. (00:32:31) I'm going to let this gentleman introduce himself. Thank you. My name is Marius jakubowski. I'm a Polish a tornado from Warsaw Poland Europe. I would like to ask you sir. Well, first of all, the Polish president Lech Walesa is visiting us in this week talking about political and economic relations between our countries. I would like you to ask you how if so the New York Stock Exchange will be involved in Polish Economic Development as an understand, of course under polish and American agreements. (00:33:09) I didn't get the last part. How are we going to be (00:33:13) involved? Well, yeah the New York Stock Exchange will be involved. If so in Polish Economic (00:33:19) Development we have I was in Poland a little over a year ago in December. Of 1990 adjustable for the economic reforms went in I went as a part of a presidential mission that was sent to Poland to help them think through some of the changes that we're making a delegation from the New York. Stock Exchange was in Moscow a little over a year ago. We have a constant flood of visitors from as far away as Moscow, but but from Hungary and Poland and other the Eastern European countries, all of whom are very interested in establishing the central Marketplace and we at the stock exchange we're going to do everything we can to help them do that. I am a tremendous admirer of what is courageously going on in Poland. I think that the there are a lot of things that have to be resolved there before a true Central Marketplace will will be able to function but we are attempting to help them as a matter of fact, there's a fund that's been set up by U.s. Government out of a ID which is investing directly in the privatization of certain polish company. So I think it's it's coming, but I don't think it's going to come overnight. Thank you. Mr. Donaldson. We have a question here from Ron Vargas. (00:34:46) Thank you. I believe you've already started answer this question what it has to do with globalization again, one of my concerns would be that. The use by the United States of the world's Financial Resources might use as its model the use of the United States by the United States of the world's natural resources. In other words. We would have a flight of capital in particular from third world countries into our market place and you've already indicated that at least on the New York Stock Exchange. We do not have a lot of international based companies that might take that Capital back into their respective companies for investment is that an issue that you see with globalization? And if so what might we do about that? (00:35:35) Well, you know, we have the most advanced Market in the world as I said before, I think that American investors have traditionally been relatively Limited in their view about where they invest their money. I mean for years and years and years most American portfolios were a hundred percent and you A Securities today, I suspect if an individual owns three or four or five percent foreign stocks. That's a lot of institution owns 10% That's a lot. I think it's going to increase dramatically over the next period of time the stock exchange represents two things. As far as I'm concerned one is it's a capital raising mechanism and access to to going public in this country and being listed on the stock exchange gives the opportunity for for lesser developed companies in lesser developed countries to raise money in this largest Capital Market in the world. It's also a reservoir where people put their savings and it gives people an opportunity to invest in those companies and lesser developed company. So to me, it's that's an absolute central part of what we're doing that they be able to make those Investments here in our domestic market with the regulation and supervision and liquidity and so forth that that we've built into our markets as opposed to having to go overseas. He's to do that in a much less efficient way and to me the the immediacy of that need calls for a trade-off in terms of our rigid position and accounting. Thank you. We have a question now from Jerry Noreen. Yes. Mr. Dawson. What if you could comment on the specialist system in general and more particular and specialist firms namely the shrinking of the number of specialist firms making markets and the capitalization of those firms in the positions where we have the widely swinging Market that they are still able to make those markets. We've seen a lot of the retail brokerage firms coming in and buying out some of those specialist firms. Now, you know, the the issue is the central dealer or specialist and and there has been a shrinkage in the number of firms. There are currently roughly four hundred and some odd 425 30 Specialists located in forty three or four. On the floor of the exchange these are these are entrepreneurial organizations. They are businesses that have been built up through the years. We're trying to do everything that we can to help those Specialists earns. We don't own those firms. I mean, they're they're part of the system. They have to conform to our rules and regulations, but they have a job to function. We regulate them. We're trying to do much more in terms of helping them organize themselves and helping them lay off risk, if you will and in terms of more sophisticated ways of doing the job that they're supposed to do in terms of raising capital in bringing in outside Capital into those firms and helping them Transit from family ownership into you know, more permanent type of ownership when you talk to most of the specialist. However, they really don't complain about lack of capital because After all, there is no amount of capital available that the can stand there with a basket and hold up a market that really isn't the specialist function The Specialist function is to make a continuous Market, but but not to their couldn't be enough capital in the world to stand there on in 1950 or 1987 and hold a basket. So I think that in some quarter there's an unrealistic expectation of just what the specials should do. Most of the Specialists tell us and we back this up that if they can get more sophisticated in their risk management and turnover rate that they think they have enough Capital to do the job that they're supposed to be doing. Thank you. You are listening to William Donaldson the chairman and chief executive officer of the New York Stock Exchange speaking to the Minnesota meeting on the station's of Minnesota Public Radio. We have a question here from here old doll. (00:39:53) Thank you. I'm Howard Dalton. Mr. Donaldson. I wonder if you could comment on the impact of off the floor trading on the exchange and on the capital and on the auction (00:40:02) Market. Yeah, I mean this this really is when I talk the fractionalization of the marketplace. That's really what I'm talking about that that really is an increasing tendency to to take some transactions away from the central Marketplace and put them in these different sorts of markets as far as I'm concerned if those transactions are taken away from the central Marketplace for reasons that they get better prices for the customers. So be it but if they're taken away for other reasons, in other words at either end of the marketplace at the high end of the market place if a transaction is taken let's say after hours to London off the market in order to avoid our regulation in order to avoid the printing of that transaction. The transaction is done in London. It doesn't appear on our tape so millions of shares of stock can trade outside of System and nobody would know about it and that's fine and may get momentary Advantage for somebody that's doing that. But if everybody did that then the central Marketplace loses its Integrity if five million shares of General Motors of traded in London overnight and nobody knows about that. The opening price. The next morning is not a true indication of what's going on in the marketplace on the lower end if orders are being taken to other marketplaces because some intermediary makes more money doing that. I think we got to do something about that if those orders are being taken to another market place because of better prices being given that's that's ok as far as I'm concerned, but I challenge people to show me too many times where a better price has achieved externally than is achieved in the auction market and if you think about it, I mean an electronic System. I mean it may well be that the two people can get together and trade a block of stock at a very low brokerage cost and agree on a price. But what does that do to the rest of the people out there who may have wanted to participate in that trade? And in fact may have been willing to pay more for the transaction one way or another if they only knew it was taking place. This is what I think is one of our Central problems in terms of resolving that sort of stuff. Thank you. We have a question. Now from Eugene said this will be a tough one. I know know there's an easement Bill the milk down from October 87. Some of the changes have been put in (00:42:36) place as you stayed at (00:42:38) can we have another one and have most of the important features on The Brady commission report then satisfactorily and acted based on your view and do we have a Level Playing Field with Chicago (00:42:52) now? (00:42:55) The Level Playing Field with Chicago. I think we refers to the Commodities markets in Chicago and particularly the Futures markets where transactions Futures on stock indices can be accomplished with a lot lower margin and in a regulatory environment that's quite different than ours and where you have the potential for the tail wagging the dog and the where the Futures markets can affect the cash Market the way it did on the crash of 1987. I would say that I would never say never but that we learned a lot from what happened in 1987. We now have a intro market system. If you will. I have a red phone on my desk that is a in immediate contact with all the other markets in the country. I might add that during the recent uncertainty about what was happening in the Mideast we had tremendous. Asian between our marketplaces and regulators and the treasury Department and the Federal Reserve and I think that we were prepared to take a number of actions had that situation turned out differently than it did. I mean I'm are at the War Began in the middle of the night and there was a lot of dissemination of information. It could have gone the other way or it could have happened on a day when we were having a triple witching thing which we had would have happened on that Friday actually, but I would say that that we have some other trading stops, you know, in terms of Market moves. I think the market itself has disciplined some of the techniques that were being used back then I mean portfolio Insurance really didn't work and I think that that is been discredited by the marketplace itself. So I would say we're much further along toward preventing that sort of situation from happening again, but again, I would hesitate to say that never Well, thank you. Thank you couple other. Okay questions are down Beardsley. Mr. Donaldson. Do you have any prediction as to when there will be a seamless Market operating 24 hours a day 7 days a week worldwide. You know my flip answer to that is when there's a customer demand for it in a sense that that we don't believe right now. I say we I don't believe that there is the demand for trading in New York City at four o'clock in the morning that would justify the the opening of the in whole mechanism and that would give us enough volume to make a an auction Market function the minute that that demand is there and part of that will be a listing of foreign Securities and so forth, you know, we're not afraid of being open for 24 hours a day what we Are doing is inching into that. We have a proposition before the SEC right now to extend the trading at the last sale for an extra hour and a half after the close of the market to try and pick up some of that trans some of those transactions that are being done overseas. We have a five-point plan which over the next period of years which will gradually open our market during periods of time during the night as that demand comes into us. So we're it's like any other business if the demand is there will be there to meet it. But the auction Market requires a system and requires a certain amount of volume to to Really function and we don't we don't see that right now coming from overseas, but it's coming. Thank you question back here from Malcolm (00:46:43) McLean. Thanks. Mr. Donaldson. I wonder if we might ask you to go beyond the stock market for just a second. You have been an economic analyst and you're now in a central position to observe. What's happening in the larger economy. Could you give us your ideas of what we might expect in the next six months to a year. (00:47:02) I was afraid that question was going to come. You know, you know II probably should duck it. I won't I'll say that. I think we've had a situation in which we were getting some pretty bad news thrown at us at in Rapid succession before the turn of the year and you know investor sentiment not investor sentiment consumer sentiment fell off a cliff economy was really slowing down. We had a situation in which the Slowdown was quite different than what it's been traditionally at the beginning of a recession IE that inventories weren't out of line and we were having a recession that had a lot to do with the financial structure in the country and particularly the banking and Savings and Loan and whole leverage situation. They've been built into the economy. I think what happened after the success in the Gulf is that We had a tremendous Resurgence in confidence in people's confidence of the ability of this country to get something done effectively and I think it remains to be seen whether that confidence will flow over into consumer confidence and a Resurgence that that we need. I my own view is that it took us at least 10 years to get ourselves up to here and debt individuals companies government that we're not going to unwind that and six or seven months and that the kind of turnaround that I think is coming is going to be slow and not not immediate, but your guess is as good as mine. Rick Holloway Mr. Donaldson (00:48:58) one question. I have about your phone. Trading overseas there are different rules as to how to go about (00:49:10) entering a trade. For example, some countries allow you to trade on non-public information and I was curious out how you would control that here (00:49:21) in issues. That would be traded on the, New York. (00:49:24) Well, that's precisely why I hope that these Securities would be bought in American markets and in particular on the New York Stock Exchange because you know, we we will regulate any security that's traded on our exchange where you know through our methods of surveillance and so forth. We will regulate that. Now we may have if those are being bought by American investors, we have jurisdiction over that through the SE c--'s efforts were increasingly having jurisdiction through the cooperation of other countries on what's going in on and it's countries, but basically that's the very reason why I hope American investors can buy those Securities in this market as opposed to a market that doesn't care about that. We're potentially doesn't care about that somewhere overseas. Thank you. Mr. Donaldson a question here from Yvonne more. Mr. Donaldson. We're constantly being bombarded with information in the (00:50:21) media about how wonderful it will be when Banks and financial institutions get to trade stocks for us. And we never hear any come back from stock Brokers as to the fact that maybe this might not be a very good idea and that there are advantages to having (00:50:37) specialized brokerage houses. Now, there is an uncontroversial question. As you probably know the Administration has put forth a is in the process of putting forth a bill that envisions a major shift in banking regulations. It is a complicated problem. It ranges from we've got 12,000 banks in this country. I believe we don't allow cross-border transactions and to cross state transactions. We've got to FDIC system and an insured deposits system that's got a lot of problems and then way at the end of efforts to change those problems come the idea that it all ought to be put in one basket and we ought to have a financial service kind of entity that does not distinguish between being a broker and underwriter or a Posit taker or a loner organization. My view is that we've got to solve the first problems first that we've got to let our banking institutions compete and in their own business in a more broad-based way across state lines and so forth that we've got to solve the deposit Insurance situation and that ultimately we've got to create a structure where federally insured deposits are not used for high risk activities and and there are some activities that are already in Banks and this is my personal View and not the view of the New York Stock Exchange, but there's some high-risk activities that are in banks that maybe shouldn't be in Banks there certainly are some high-risk opportunities in the investment business. That should be if somehow those investment businesses are put in an overall structure somehow there would be a wall that walls off the high-risk business from Those risks with the insured deposit money beyond that it's a question of whether you know a bank can do a better job of being in a brokerage business through a unit over here than the Brokers can do that have been in the business for a long period of time or vice versa whether some brokers who want to get in a banking business can do it better than it's being done. I'm all for that as a matter of fact, I'm all for trying so long as we have separate firewalls. If you will that the prevent this high-risk business from flowing into the deposit insured business.