TAKING SIDES: Markets’ old guard faces a revolution

It was a rare gathering of bulls. Not the kind that have been driving tech stocks through the roof lately, but the real bulls, the old guard that calls the shots on how the nation buys and sells stocks.

One by one they appeared before the Senate Banking Committee in New York two weeks ago to offer their opinions on the shape of investing in the 21st century.

The debate is being driven by a series of proposals by the Securities and Exchange Commission to move trading into the electronic age. The most controversial calls for the creation of a centralized market for all stock quotes, and the hearings provided the first public airing of that idea and five other recommendations. In all, they add up to one of the most sweeping overhauls of the system since the founding of the New York Stock Exchange nearly 200 years ago.

It was enough to pull six of the biggest names on Wall Street out of their cloistered world of paneled executive suites, chauffeured limousines and private planes and into the harsh light of public discourse. But the stakes demanded nothing less.

So it was that David Komansky, chairman and CEO of Merrill Lynch & Co. Inc., found himself in the same room as archrival Charles Schwab, chairman and co-CEO of Charles Schwab Corp., the nation’s leading online discount brokerage.

They were joined by Phillip Purcell, chairman and CEO of Morgan Stanley Dean Witter & Co.; Henry Paulson Jr., chairman of Goldman Sachs Group Inc.; Richard Grasso, chairman and CEO of the New York Stock Exchange, and Frank Zarb, chairman and CEO of the National Association of Securities Dealers, which runs the Nasdaq Stock Market.

The discussion often spun around such arcane issues as the economics of internalization, quote competition and trading ahead of limit orders. But you can forget all that Wall Street mumbo jumbo.

The real issue is technology.

who will win?

The Internet, online trading and a host of other innovations made possible by technological advances — not to mention deregulation — have already pulled the rug out from under the old way of doing things. Now the question is who will control the technology? Indeed, can anyone control it? And more importantly, who will win and who will lose in this sweeping revolution?

Make no mistake, this is a zero-sum game. There will be winners and losers, not least because the current system is so riddled by favoritism. Wall Street has evolved into an exclusive club for preferred customers. The super-rich, big institutional players and the traders themselves enjoy special advantages that have been built into the system over the years.

Of course, these advantages came at the expense of small investors. But who cared? In times past, they were too few in number to really count. Now, though, they are a force to be reckoned with.

Technology is democratizing the market. Today, nearly half the nation’s households own stocks through mutual funds or retirement plans or in their own portfolios, and that number is growing. As these small investors become more sophisticated, they are beginning to demand a level playing field from Wall Street.

And, for the first time, technology makes it possible to give it to them. But the old guard isn’t about to surrender its perks easily. Mr. Schwab’s was the loudest voice against centralization. Better to let the forces of competition design the markets of the future, he argued.

Is it any wonder? He embraced the rabble when no one else would, and they made him king. He’s the Robespierre of this revolution and seems to understand it best. So he’s willing to take his chances.

Mr. Zarb was equally vociferous for free competition. But he’s also riding high on the technology curve. As for the others, well, let’s just say it was an interesting study in human nature to read about these advocates of free-market economics delicately dancing around the question of more government regulation.

Indeed, the old bulls are in danger of being gored. They seemed to be more willing to take their chances in Washington, where they still wield considerable influence.

As Robespierre might have said, let the heads roll where they may.