Ringing the Bell on the NYSE: Might a Nonprofit Stock Exchange Have Been Efficient?



This spring the New York Stock Exchange, Inc. (Exchange or NYSE) completed an historic restructuring. On March 7, 2006, the NYSE completed its merger with Archipelago Holdings Inc. (Archipelago), a publicly traded electronic trading platform. As a result, the old NYSE itself became the New York Stock Exchange LLC, a wholly owned subsidiary of NYSE Group, Inc. (NYSE Group). The former members, or seat holders, of the NYSE received one of three forms of consideration: all cash, all stock in NYSE Group, or a package of cash and stock. The NYSE Group then allowed those former members to offer their shares to the public in a secondary offering.

Because the NYSE was a not-for-profit corporation, the merger was also a change in organizational form. The change from nonprofit to for-profit, or demutualization, has mostly been viewed as a long-overdue response to new, on-line competition from “electronic communications networks” (ECN’s). But there has been little assessment of the strengths or efficiencies of the nonprofit form of the exchange. This paper presents the possibility that the NYSE’s choice of form was an efficient solution to a classic “lemons” problem, in which misinformation from bad issuing firms (firms whose shares trade on the exchange) could drive out good issuing firms. We apply a robust theory of nonprofits in which the highest demanding consumers of a nonrival good organize the production of that good.

In this case, investment bankers and other financial intermediaries organized to produce liquidity. The resulting nonprofit was the former NYSE, which was able to align issuing firms’ incentives to disclose with those of investors. Banker-owners of the NYSE acted as gatekeepers to the exchange, screening issuing firms through an extensive “due diligence” process, providing capital via underwriting, and connecting issuing firm insiders to one another via initial public offering (IPO) allocations. Over a period of many decades this system maintained an equilibrium in which issuing firms, big and small investors, and exchange members could participate with relative ease, transparency and fairness in the exchange. The shift to a for-profit corporation will have a significant, and potentially deleterious, impact on this equilibrium as it breaks up the longstanding components of the nonprofit system.


Banking and Finance Law | Business Organizations Law | Contracts | Economics | Law and Economics | Securities Law

Date of this Version

July 2006