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Meir Rinde


>>Secret City

Taking Stock

Philly’s Exchange is up for sale. Bet you didn’t even know we had one.


By Meir Rinde

October 31, 2007


The Philadelphia Stock Exchange has put itself on the block, and the bidders are thought to include the owners of the two biggest U.S. exchanges, NYSE and Nasdaq, according to The Wall Street Journal.

Shocking news to some, no doubt. (“We have a stock exchange?”) But it’s hardly a surprise to those who follow the financial markets. Around the world a small number of big exchanges have been buying up smaller ones so they can satisfy trader demand for one-stop investment shopping.

“That’s creating pressure on the smaller players to respond in one way or another,” says Michael Pagano, a former Wall Street investment analyst and now an associate professor at Villanova University. “In other words, to sell out and become part of one of these bigger organizations, or somehow invest and evolve in a way so they can remain independent and relevant.”

PHLX (pronounced “Phil-Ex”) is the nation’s oldest exchange, and the third-largest exchange of stock options and other derivatives. But despite several self-transformations during its history, on its own it can’t provide brokers with the kind of access to overseas markets or the stocks, bonds, futures contracts and other products available through its competitors.


For better or worse, stock exchanges are no longer the hurly-burly, bell-ringing circuses of yore. During a visit one afternoon last week, the trading floor in the exchange building at 19th and Market streets resembles less an economic hub than a college computer lab during finals week.

Rows of computer racks reach toward the ceiling, dangling electronic spaghetti. Tieless men in khaki pants sit side by side on bar stools, wearing dark-colored smocks over dress shirts or polos, drinking in data from double-screened computers arrayed on long counters.

Next to the trading area is a mostly empty space that served as the equity or stock trading floor—“a feature of the Philadelphia Stock Exchange virtually since its founding,” as the organization’s annual report says—until it finally closed in December to make way for electronic transactions.

“It used to be very noisy, with brokers running around,” spokesperson Barbara Sorid says. “It’s now very quiet.”

In fact, despite its name, the Philadelphia Stock Exchange no longer exchanges much stock. Rather, it pays its bills by handling 14 percent of the fast-growing U.S. trade in derivatives, much of it consisting in trade of stock, currency and index options.

Options let a trader reduce risk by letting him, for example, buy a stock at a set price in the future no matter how much its actual market price goes up or down. Globally, options and other derivatives also let traders make educated bets on such variables as the future price of pork bellies, the worth of the Thai baht, or the value of an index—the Dow Jones Industrial Average, for example, or a more obscure index of, say, high-cap electric utility companies, an index likely created for the purpose of options trading.


The exchange made another big change recently. Since its establishment in 1790, it’s been mostly a mutual association, a private club owned by traders who’d buy and sell each other stock and debt. Members could be fined for stepping out of the exchange during business hours, and fined even more if they took their sales book with its valuable list of asset prices.

The telegraph helped break open that relatively closed world, and electronic communications are now dismantling it. Traders no longer have to hang out in the exchange building to do business. In 2000 about 900 people worked on the PHLX floor; now it’s down to 300.

The private club idea fully went out the window in 2004, when the exchange followed industry trends and raised money by selling off chunks of itself to several big finance firms, including Merrill Lynch and Morgan Stanley. That pissed off some of the old shareholders, who sued and reached a settlement just last month, opening the way for the current sale.


In addition to NYSE Euronext and Nasdaq, possible bidders mentioned in the financial press include a consortium led by Goldman Sachs and Bala Cynwyd-based Susquehanna International Group. Pagano says some foreign exchanges might also be interested.

It’s unclear whether the next owner of PHLX will keep what remains of the trading floor. Despite the dominance of electronic trading, Pagano notes that there may still be benefits to having traders work in one space, face to face. If the guy next to you suddenly pulls a long face, it might signal a market downturn and mean it’s time to sell.

At the same time, exchanges are competing to cut costs and keep down their fees, and if those visual and verbal cues aren’t valuable enough to the traders whose companies pay for them to sit on the exchange floor, it doesn’t make sense for PHLX to pay rent for decreasingly useful floor space.

That’s not necessarily bad news. Even if someday there are no longer traders sitting in front of computers at 19th and Market, they’ll keep doing the same work somewhere nearby. The exchange itself employs 380 people, including programmers, help-desk staffers and monitors who make sure SEC rules are followed. Any future owner will still need those workers, especially if the acquisition gives PHLX more access to the global market.

“If they close down the floor and do more on the automation side, it could very well be that there’ll be more order flow coming to the PHLX and more business in general,” Pagano says. “So the net effect on employment will be marginal at best. You could make the argument that it could actually be a positive thing.”


Meir Rinde last wrote about the growing obsolescence of Wireless Philadelphia. Comments on this story can be sent to



The article is also HERE in the Philadelphia Weekly archive.