Big Board seat price up,but a drop may lie ahead

Last month, the New York Stock Exchange got a vote of confidence.

Two seats on the exchange sold at the highest price since January as the market interpreted Goldman Sachs’ $6.5 billion purchase of the largest specialist operation on the NYSE as a sign that the exchange has a long-term future.

But the rise in value may be short lived.

A number of seats are likely to be put on the market as a result of the recent flurry of mergers among financial institutions. More mergers are likely in the future, which will create a steady stream of seats and a probable drop in prices. Then there is the fundamental question of the stock market’s long-term viability as more and more trading is done electronically.

Who needs specialists?

“The technological advance is going to mitigate the floor-based exchange in the long run,” says Greg Bokach, a senior equity trader at Kansas City’s American Century Investment Management, which has $115 billion under management. “Do you really want a specialist system?”

Credit Suisse First Boston will likely be the first post-merger firm to unload unwanted seats. The acquisition of Donaldson Lufkin & Jenrette Inc., announced in late August, will more than double the firm’s NYSE memberships to 26, from 12. Mike Clark, First Boston’s head of global equity trading, says the company plans to reduce that number by five seats.

Chase Manhattan Corp.’s merger with J.P. Morgan & Co. will boost the number of seats it holds to 13, from three. But Goldman itself is likely to have the highest number of excess seats. Its membership in the exchange will almost triple to about 60 after the purchase of specialist firm Spear Leeds & Kellogg.

“The acquiring firms are picking up a lot of seats from the firms that they are buying,” says Tim Heekin, head of trading at dot-com investment bank Thomas Weisel Partners in San Francisco.

More than half, or 840, of all of the exchange’s 1,366 seats are currently leased – typically from former traders and their families. And many of those holders roll over their leases from year to year, so that only a small pool of leases usually becomes available. As a result, prices have risen to a high of $350,000, up from last year’s $300,000.

Leased seats

A month ago, however, a lease went for $294,000. And with several leases coming to the market, the future may be different. The five seats that First Boston plans to give up are all leased.

While it’s not clear what Goldman plans to do with all of the seats, a decision to give up some of its membership leases could depress prices.

The value of a seat on the NYSE has seesawed over the past year as traders speculated on the long-term future of the exchange. In August 1999, Thomas Weisel Partners paid an all-time high of $2.65 million for a seat. But shortly after the record purchase, the exchange’s plans to go public were put on hold, and seat prices tumbled to $1.65 million, where they remained until last month, when in one week two seats changed hands for $2 million each.

The biggest factor affecting the price of NYSE membership, of course, is how well the exchange responds to the threats of electronic trading. There is talk about creating its own electronic system, adding more trading hours and making a big push to increase foreign stock listings. But the major question is what the Big Board will do with its specialist system.

“There are some market structure issues,” says First Boston’s Mr. Clark, “like removing the middlemen. But they are not doing it quickly enough.”

Meanwhile, an owner put a new seat on the market for $6 million, more than triple the offer of $1.75 million that’s on the table.