Updated: May 3, 2013 12:14PM
Originally published: September 25, 2003
Hypocrisy. When you preach one thing, but your actions are exactly the opposite, you’re bound to get found out in an embarrassing way. That’s what happened to the New York Stock Exchange -- our symbol of free markets and free-enterprise capitalism.
A system that had worked so well for so many years -- the specialist system -- has lately been facing the challenges of technology. Other exchanges set up competitive market making systems. Or they moved toward an all-electronic technology system of order matching. But the NYSE stuck with its specialists -- a system of elite traders who were exclusively entitled to see all orders as part of their requirement to maintain fair and orderly markets.
It was a system of honor that was tough to maintain in a dishonorable era -- and an era that required increasingly large amounts of capital to perform the designated function. Yet it was a system that the exchange has always defended. And the chief executive defender was CEO Richard Grasso.
As one market insider said to me last week, “They paid Dick Grasso a $142 million ransom to defend a system that should no longer exist.”
But when the specialists and floor broker members stopped reaping windfalls during recent lean years, they became incensed that their leader reaped benefits while they were feeling the pinch. Many of them called for his resignation. Otherwise, there’s a sense that they might have jumped to his defense.
Hypocrisy breeds hypocrisy
But there has been another level of hypocrisy at work, and another after that. The New York Stock Exchange has been a leader in promulgating rules for the companies that listed their shares for trading. Those rules require independent directors to set governance, compensation and audit policy for NYSE listed companies. Yet the exchange refused to live by the same rules it demanded that others abide by.
And the exchange directors -- many of whom had to live under those rules as corporate executives -- maintained that they didn’t know the full extent of the compensation that appears so egregious. Frankly, it’s astounding that the only (former) NYSE director who has been questioned about financial indiscretions is Martha Stewart.
And then there’s the next level of hypocrisy. It comes from Congress, which is now crying for action and more regulation of the financial markets. Yet these are the same elected officials who have never managed to pass a meaningful campaign reform legislation because it would impact their own “compensation.” The idea that they should be setting compensation rules for the free market system seems the height of hypocrisy.
An old criticism
No one dares call the kettle black without looking at his or her own pot. But a long memory requires me to give some credit to an early naysayer on this very subject. For years on financial television stations like the old Channel 26 Stock Market Observer, a man named Richard Ney railed against the specialists, calling them every polite and not-so-polite name for thief. Were he around today, I’m sure he would be smiling to see their hypocrisy exposed.
So who dares today to point the finger at this centerpiece of our economic prosperity? History is replete with examples of moralists who felt free to cast the first stone, and found themselves the ultimate target. So instead of moralizing or legislating, the answer is to let a truly free market speak. And if the free market is not protected from competition, then it will effectively choose the eventual winner. That may be electronic exchanges -- or maybe not. But the free-market answer will not be rigged to favor those in power.
People who live in glass houses should not throw stones. Or practice hypocrisy. Because someday, someone will look through the glass and see through the hypocrisy. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange and McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast, and can be reached at her Web site, www.terrysavage.com.