Josh King:
(silence). From the Library of the New York Stock Exchange at 11 Wall Street, you are Inside the ICE House, our podcast about markets, leadership, and vision in global business, the things that have made the NYSE an indispensable institution for over 225 years. I'm Josh King, Host of our premiere episode, Head of Communications at Intercontinental Exchange. No place in America has been a bigger magnet for doers and dreamers, like the building we're podcasting to you from today. So, from today forward, when one of today's visionaries walk through our door, we'll usher them up to the library to learn what makes them tick, conversations we'll call them From Inside the ICE House. We hope you'll subscribe through iTunes, or wherever you get your podcasts, and rate us, so that other listeners like you can know where to find the ICE House.
Josh King:
Why call it that, the ICE House? Almost five years ago, in 2013 Jeff Sprecher, the Founder, Chairman, and CEO of Intercontinental Exchange, or ICE, as it's known, led the company's acquisition of the New York Stock Exchange, the marquee name now among a global family of exchanges, clearing houses, and data solutions that ICE operates around the world. From the trust and confidence embedded in exchanges like this, and ICE's other markets, investments flow, businesses thrive, and economies grow.
Josh King:
The trading of equities, bonds and futures markets, based on everything from oil, to sugar, and interest rates is the core purpose of ICE. The people you'll hear on this show, the core beneficiaries, along with their companies are the world's most robust capital markets operating below us, even as we record this first episode. So, slap on a pair of headphones, keep doing whatever you're doing, and enjoy the inspiring stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the New York Stock Exchange, and ICE's exchanges around the world. Our first conversation From Inside the ICE House, with Tom Farley, President of the NYSE, right after this.
Josh King:
Inside the ICE House is brought to you this week by the Coca-Cola Company, NYSE ticker symbol KO, which this week chose the New York Stock Exchange as a backdrop to celebrate Diet Coke's brand makeover, and four new flavors of Diet Coke, Ginger lime, feisty cherry, zesty blood orange, and twisted mango. Fans of the number one selling zero calorie beverage gathered on Experience Square, right outside the exchange, at the corner of Wall and Broad, to let thirsty passers by in the financial district taste what's different inside their colorful cans. Coca-Cola is the NYSE's 27th longest listed company, with its stock beginning trading on November 6th 1990.
Josh King:
You can see Tom Farley almost every day on the iconic Bell Podium, next to CEOs the world's leading companies, political leaders, entertainment and sports icons. But when the president of the New York Stock Exchange isn't helping to ring in another day of trading, he's focused on his day job, running the largest stock exchange in the world. That could be in New York, or in Davos, or the Middle East, or Asia, where it was a few weeks ago. Or in Silicon Valley, or Dallas, Texas, visiting with listed companies or IPO prospects, readying to ring their first bell.
Josh King:
When ICE bought the NYSE in 2013, Tom, then just 39 years old, and president of the New York Board of Trade, became this venerable institution's chief operating officer, named its president a year later, the 66th president in its history. Tom wasn't the youngest ever, that title stays with William McChesney Martin, who rose to that role in 1938, and remained here until he was drafted into service in World War II, overseeing the Lend-Lease program with Russia, and liaising between the government and the private sector. Martin then became the longest serving chairman of the US Federal Reserve Bank. Tom, you're still young guy but following the footsteps of people like Martin, John Phelan, Dick Grasso, and more than 60 others who presided this building. You've got big shoes to fill. Welcome to the program.
Tom Farley:
Hey, thanks a lot. Thanks for having me, Josh.
Josh King:
Now, Tom, we recorded most of this conversation before the Dow Jones Industrial Average plunged 11,075 points on February 5th. That was the biggest point drop in its history, and moved later into the week into territory that qualifies as a correction, 10% decline in the S&P. Were we overdue?
Tom Farley:
The history of the capital markets is littered with long periods of steadily increasing prices in a low volatile environment, followed by shorter periods of time, rapid descent in prices, large increases in volatility. So what we're seeing is entirely normal for a market. In fact, that happens every year and a half, on average, where you'll see a market retrench eight, nine, 10, 11 12% from the top to the trough. And so in some sense, yes, we were overdue, because we've been in this nice period of increasing prices. But I also don't want to be pollyannish. There's a lot of volatility, there's a lot of concern, people are worried about their nest eggs, but, it feels pretty normal to me, it feels like the normal functioning of the market.
Josh King:
It would be tough for us to launch this podcast without reflecting on the drop, and the ensuing days of volatility. Tell us about the state of the markets, the state of the technology that drives the markets.
Tom Farley:
Sure. Every time we go through one of these periods... I'll put these in quotes, because they never repeat exactly, they rhyme. But you go through a period of extreme volatility, whether it was the Chinese devaluation back in August of 2015, or the Brexit vote, the Donald Trump's surprise win in the election, you see increased volatility, and we, as an exchange, learn. And so, in particular, when we had the Chinese devaluation, back in August of '15, there was wild volatility in the markets, by some metrics, the most volatile day in the history of the markets.
Tom Farley:
As an exchange operator, we just look at it to say, are there things we can do to improve that aren't going to eliminate volatility, but are going to minimize it to the greatest extent possible? And we actually put a number of prophylactic measures in on that day, and they've worked great this week. Trading has been very orderly. Yes, stocks have been whipping around, but they haven't been gaping an extraordinary amount, and that's good. You're going to get volatility, but our new measures that we put in place, defensive measures, have minimized that volatility.
Josh King:
As the president of the New York Stock Exchange, though, one of the actual mechanics and moves that you make as you watch the ticker edge down toward these industry-wide circuit breakers that are put in place to prevent another crash, bring us back to Monday, you were looking at the ticker. What's actually happening with your team? What numbers are they looking for? And then, what would happen if they reached those numbers?
Tom Farley:
Yep. Monday, or even yesterday, Thursday, was another thousand-point drop in the Dow. The way it works is, the market-wide circuit breakers, which apply not only to stock exchanges and stock options exchanges, but also to the futures exchanges, they're pegged off a 7% decline in the S&P 500. So that number is known. As of about 7:00 AM every morning, it gets public.
Josh King:
Why did it become seven?
Tom Farley:
7% was the expert's best judgment based on data, by holding a finger in the air, that, boy, if the markets went down 7% in a single day, it might be time to take a break and let people digest information and make prudent decisions about-
Josh King:
That would be-
Tom Farley:
... investing.
Josh King:
... 15 minutes at 7%?
Tom Farley:
Yeah. So you'd have 15 minutes. What I want to point out is, there was nothing for us to do on Monday. If the time to do something is when the markets are going crazy, I've failed at my job, and all my colleagues have failed at our jobs. Instead, we practice this all the time, not only internally, on a daily basis, to make sure we're ready for it, and all the right mechanics are in place, but on an industry basis, once a quarter, we do a test of these market-wide circuit breakers, because they've never been hit. You want to be ready on the day it actually happens, and it's not something that you don't want to have practiced.
Josh King:
How did the systems work this week, in your view, all of them, from what was happening inside the building at the exchange, to market-wide?
Tom Farley:
The systems work really well. And again, this isn't the kind of thing you get ready for on the crazy day. We build systems to withstand the craziest possible day we can imagine, and then we multiply it by some factor. This week, on Monday, we are processing five times as many orders than we do on a typical day. In total, our entire systems plan, on an average day here, processes 50 billion messages. So that's not just orders, but it's market data from other exchanges, so on and so forth. I haven't seen the numbers, but I suspect from Monday, that was probably 100 billion, or even greater than 100 billion. So the fact that we had a busy day, it's something we're ready for. We process these huge numbers of transactions, quite frankly, it's our it's our job to be able to do it on a day like on Monday or a day like yesterday.
Josh King:
A lot of reporting this week was about some of the products, like the inverse VIX product. Were there any learnings this week about processes or products that could get changes going forward?
Tom Farley:
The bigger learning for me is how we segment these products in our marketing and in the way we speak, so that investors understand the different types of products, and let me explain. First, you have the great companies listed on the New York Stock Exchange; IBM, Alibaba, others. Next, you have ETFs that didn't exist, as we talked about, when I was going to college, but now are $3 trillion of assets under management. And many of these ETFs have just been fabulous tools, not only for professional, sophisticated, institutional investors, but also, the mom-and-pop retail investor, it allows them to allocate capital in a more sophisticated, broad-based and inexpensive way than they have previously. Then there's a third segment of sophisticated leveraged ETFs and ETNs, inverse ETFs, and ETNs, and even those products tie to more complicated indices. So at a 50,000-foot level, these products worked.
Josh King:
As we pick up now on the portion of our show we recorded earlier prior to the volatile days on the worldwide exchanges, Tom, walking through these halls, looking at the portraits of past presidents on the walls, do you hear their voices reverberating?
Tom Farley:
I was intimidated to get this job, it was it was a big deal. And I wanted to do a great job, I felt like it was almost a civic duty. And the first thing I did was I sought out mentors who could help me be the next great head of the exchange, and one of those is Dick Grasso. When I see the pictures on the wall here, I'm proud to be the head of the exchange and to follow in their footsteps, and, I'm glad that if you took the pictures of the management team here, they actually look quite different. We have Stacey Cunningham, our COO, and Hope, who runs our DC affairs offICE, Kelly Lafleur runs our marketing investor relations efforts. And so I suspect that 100 years from now, whoever's running the exchange will look at oil paintings, they're going to look very different than the ones that currently hang here at at 11 Wall.
Josh King:
One thing that Dick Grasso made famous was really that televised bell ringing. It was always wrong, but we associate it with the image of Dick up on that podium. Just today, we're at the beginning of February, three IPOs in one day, at a half billion dollars, there abouts, or more, topping off a huge January. Before we get into you in the exchange, what's happening right now with this business, as you just look at one month ticked off for the year?
Tom Farley:
One of the things I learned from Dick... I knew coming in here that the floor was an important venue for trading stocks, and in particular, at the open and the close, and having the combination of humans and technology. But Dick pointed out, it's also an opportunity to provide publicity to our listed companies. And he would say to me, "Lean into it, have fun, really celebrate the brand's when you're up there on the bell podium, or when you're doing an event or activation here at the exchange." And I would call him, and I would brag about, "Well, we're doing this good thing, and we're going to drink a particular soft drink from the podium." And one time he said, "Tommy Kid, I had an adult male lion on the podium for bell ringing. You're not going to impress me."
Josh King:
We're just watching the video of you on the floor, you've got three IPOs working today. But just this January, what's your... You and the management team, Stacy and John, think about what you guys have accomplished in this month, and what are the numbers telling you?
Tom Farley:
The best days here are IPO days. And as you said, today we had three. In fact, I don't think there's ever been a day in the US markets where there've been three IPOs that are $400 million or greater. I think this is it. But the reason why IPOs are the best days is that it's capital formation, and we can actually see it, and capital formation is great for the economy. That's money that can be invested in companies in terms of more greater innovation, it's money that can go into investors' pockets, that can be recycled in the economy, it's money that can create jobs.
Tom Farley:
We're at a moment here, in February, the beginning of February 2018, where the capital markets are wide open, the floodgates are wide open, and that's great. Now, it won't last forever, but in the meantime, we're having a record January for capital raising, February looks like it'll be quite busy, as well. And the rest of the year, frankly, there's a very full pipeline.
Josh King:
Now, let's go back, Tom Farley. You're the son of a former nun, you came up to Georgetown, playing a lot of baseball. How does a guy from those origins end up at 11 Wall Street on that podium?
Tom Farley:
So my mother, God rest her soul, I lost her suddenly a few years ago, she is a former nun. But just to get the full story out there, because it sounds so salacious, she went into a cloistered convent at age 18, where you weren't allowed to leave the convent, other than to, say, shop for groceries for the other nuns. And the night before a final vow, she went to her mother spirit, and she said, "Mother spirit, I really think I want to have a family." And the mother spirit said, "Kathy, I've always known that about you, why don't you go ahead?" I think my mom was like, "Well, why didn't you tell me that five years ago?" So she left the convent, and shortly thereafter, within a month, met my father, and they lived happily ever after.
Tom Farley:
I have no idea how I got to be in this position, from where I came from. I never could have planned it. Very humble origins, I grew up in Bowie, Maryland, from my mother, who was a school teacher and a counselor, and from my father, who was a civil servant, and still is, in many ways. But from them, I got a love of people, I got a love of commerce, frankly, business, and I just got this great work ethic of... well, an ethic of working hard and respecting people, and I just... For whatever reason, it's put me in great positions. And I got lucky, and I hooked up with a guy, Jeff Sprecher, the Chairman of the New York Stock Exchange, when I was a young man.
Tom Farley:
He's a bit of a swashbuckling entrepreneur, he's willing to take risk, and he put me in these incredible positions. And before I knew it, as a young man, I was running the New York Stock Exchange. And I've never lost the sense of wonder and appreciation, and I find it to be an absolute privilege.
Josh King:
And we'll get to Jeff in a minute. One thing your parents also, obviously, did was turn you into a history buff. It doesn't get any more historic than where we are right now, the corner of Wall and Broad. 1790, Alexander Hamilton lays out an economic and financial vision for America right here. What happens?
Tom Farley:
So, I think I drive our colleagues nuts, because I just love this stuff. It all went down within 50 yards of where we're sitting, right at this very moment. In 1789, even before '90, George Washington was sworn in. And in '90, Alexander Hamilton penned the first report on the public credit, which was that seminal document that laid out a national financial plan. It said, let's nationalize the states' debts. Many of the states were failing at that moment. And then in '91, he wandered up a couple blocks to the North, and he and Jefferson agreed that plan. In return, Jefferson asked for the capital to be relocated Washington, DC, which, of course, it was.
Tom Farley:
And then what happened was magical. You had entrepreneurs who wanted to start businesses, the economy was booming, investors wanted to invest in those entrepreneurs, and they would gather right here in the corner, and very quickly, they realized, wait, hey, back in Holland, many hundred years ago, there came about this idea to finance ships by cutting the ship into securities, and trading those securities. Let's try it. The very first security they traded out front here was Bank of New York, which Alexander founded, and in 1792, 24 enterprising brokers, all men... Would have worked better with a few women, and fortunately, we now have women brokers. It took 175 years, I'll I'll add.
Josh King:
Until Muriel Siebert-
Tom Farley:
Until Muriel Siebert-
Josh King:
... gets her seat.
Tom Farley:
Exactly. They penned this Buttonwood Agreement, and that gave birth to Stock Exchange. And what has happened since, for 225 years, great men and women with ideas, dreams, have come to the exchange, they've raised money, so that they can go build these dreams and reality, and make the world a better place.
Josh King:
Fast forward then, Tom Farley, it is March 28th, 1985, up on the podium is Ronald Reagan, President of the United States, to ring the opening bell of the exchange. Let's have a listen.
Ronald Reagan:
Thank you. Thank you all very much. This is a great view from up here. It's kind of like being at a Saturday night tag team wrestling match at the garden. In a few minutes, I'll ring the bells, so trading can begin and... But I know that if I don't, it'll ring itself anyways.
Josh King:
That's Ronald Reagan, 1985. And then just a few weeks ago, you were with President Trump in Davos. So between '85 and today, presidents will come and go, what has changed about the exchange, and what will never change?
Tom Farley:
I absolutely loved listening to that clip. Man, did that guy have a comfortable way with words. Not much has changed. And I say that, and people shake their heads. If you go down to the floor now, you see a lot more computers, and a lot of blinking lights, and fewer brokers. And so people want to very quickly move to the evolution in technology, and how different it is, and how it's changed so radically. And all of that is true. But at its core, we do the same darn thing we've always done, we help entrepreneurs raise money, and that comes in the form of IPOs, and follow-ons. A follow-on is raising money for an already public company.
Tom Farley:
And then, as a necessary byproduct of that, an important necessary byproduct, we trade the securities of those companies. That's all we do, that's all we've ever done. We always used technology. In the very earliest days, what did technology look like? It looked like having a team of horses to run between exchanges, or the upstairs brokers' offices and the floor. And then it looked like having telescopes, and planting people on tops of buildings between here in Philadelphia to be able to pass data with flags and telescopes in a half hour that had otherwise taken a day with horses.
Tom Farley:
And then technology, ultimately, look like the telegraph, and the telephone, and the internet, and microwaves, and lasers. And so that continues, and that will continue to change and evolve, but the core mission of our business, it's very simple. I just want to be the greatest exchange in the world at helping entrepreneurs raise money to make the world a better place, and the greatest exchange in the world at efficiently matching buyers and sellers to help this flywheel of free enterprise keep spinning.
Josh King:
One thing you don't hear when you're down in the floor is the open outcry that is in the subconscious of people's memories, of the New York Stock Exchange. And when that ended, some questioned the very viability of this building and its purpose. So then comes Jeff Sprecher, you mentioned him earlier, this upstart from Atlanta, who had built ICE on an idea of bringing transparency to energy trading. He wanted to do the same thing for equity trading. How did Jeff and the ICE model breathe new life into this building?
Tom Farley:
We knew what was going to happen when we announced we were acquiring the the New York Stock Exchange. In fact, we could have written the stories. I don't think we necessarily anticipated how many of those stories will be written. But the the story would go something like, Jeff Sprecher, entrepreneur who introduced electronic trading futures and shut trading floor after trading floor, is now buying the New York Stock Exchange, and will shut the iconic 11 Wall trading floor. The difference here was, we knew, from the very first day, that not only was this not something we were going to shut, we are going to embrace it, we were going to invest in it, we are going to lean into it.
Tom Farley:
We've invested, as you know, a lot of money in this actual building, the trading floor. We've installed even more technology, we've beautified that Bell Podium, we've pulled that iconic bell out front, that people love to see and to enter hear. And we knew it all along, but it was the kind of thing where the more we said, "No, we're going the other way. We want to be the only trading floor in the world, because it will differentiate us, it will result in less volatility for the trading of the stocks listed on the stock exchange, it'll result in more publicity for our listed companies, so that they can sell more products, goods, and services, and ultimately return more dollars to shareholders." But the more we said that, the more the press thought it was some elaborate or cynical ruse, and so we just demonstrated it. And for five years, that has been the secret to our great success here at the New York Stock Exchange.
Josh King:
You were mentioning when you and Jeff and the team in 2013 came in and bought the exchange. At that time, I think you mentioned earlier, too, you were running the New York Board of Trade. And for those of our listeners who are a little unfamiliar with what happens in commodities trading, let's go back to the hallowed halls of the of the commodities from Duke & Duke to remember how that all works.
Speaker 4:
This is not a meal, Valentine. We are here to try to explain to you what it is we do here.
Speaker 5:
We are commodities brokers, William. Now, what are commodities? Commodities are agricultural products, like coffee that you had for breakfast, wheat, which is used to make bread, pork bellies, which is used to make bacon, which you might find in a bacon and lettuce and tomato sandwich. And then there are other commodities, like frozen orange juice, and gold. Of course, gold doesn't grow on trees like oranges.
Josh King:
That's the great Ralph Bellamy and Don Ameche, and of course, they're about to hear from Eddie Murphy as Billy Ray Valentine. But for those who are don't remember the Duke brothers, what is the average consumer... why should they They care about how commodities like frozen, concentrated orange juice are traded.
Tom Farley:
Let me just go back, just a personal anecdote. So I first got my big break at age 29, when Jeff Sprecher brought me in to be the head of the New York Board of Trade, a business he acquired just recently for over a billion dollars. But the New York Board of Trade trades sugar, coffee, cocoa, cotton, orange juice. It is very much the exchange that Trading Places was emulating, so much so, in fact, that they filmed it on the floor of the New York Board of Trade. And in fact, some of our New York Board of Trade employees who are still with us today were extras in that in that movie. And I can tell you, whenever somebody asks what products we traded, as soon as I got to frozen concentrated orange juice, the Duke & Duke references always came out.
Tom Farley:
But one one final anecdote on that. We have a gentleman here named Tom Green, and on my very first day, Tom could tell I was green, I was going to be eaten up alive by these tough floor traders, and I needed help. And Tom came to me and said, "Look, you and I can form a partnership. I'm a rough and tumble guy that knows how to run a trading floor and understands the commodities markets. Why don't we team up?" And today, Tom celebrated his 46th year at our company, and today, he's now running the New York Stock Exchange trading floor, and it's people like that. Without him, and without our management team, we would not be the big success we've been over the last several years.
Josh King:
And no one kicks people in the butt like Tom Green.
Tom Farley:
No, no, it's fabulous. Having a lieutenant like that, who can do it with a smile, with respect. But to answer your question, the New York Board of Trade is the world's futures exchange for important products like cocoa. And what does it mean to be the world's futures exchange? It means that the Ivorian cocoa farmer, living in a very difficult country, in a difficult part of the world, who's, quite frankly, subsistence farming, trying to provide a enough cocoa to make enough money to feed his or her family, can hedge next year's crop in a way that allows them to borrow money to be able to actually grow the crop.
Tom Farley:
So by us coming in, introducing a more efficient means of trading those futures, in a very fundamental way, that is helpful to society, that is allowing for the creation of better outcomes for that farmer, or for that consumer of cocoa. And it's the same for sugar, or orange juice, or other products, what have you. So I've always felt a tremendous sense of mission, whether it was at the futures exchanges, or now, at the stock exchanges. Because while you don't read about it in the press, and it doesn't make great copy, the capital markets, in a real way, are helping people.
Josh King:
There are coffee grading rooms at the New York Board of Trade, you actually have to understand how good the coffee is, that's being traded. How did you become an expert in agricultural issues when you got into the barter trade?
Tom Farley:
Oh, geez, I never got there. The good thing is, the exchange was full of agricultural experts, and I really saw my role, principally, as moving the New York Board of Trade into the 21st century in terms of technology. And also, it was an inward-looking business at that time, it was more focused on what's my title, or how many people do I manage, and really, turning it outward, and listening more closely to customers in terms of how can we improve the product in a way that will make hedging and trading more more efficient? I actually got invited to give the keynote address at the World Cocoa Forum Conference.
Josh King:
I never miss it.
Tom Farley:
Am I a cocoa expert in the world? No. And so I had to get up in front of them and start by saying, "Look, we're going to talk about the capital... We're going to talk about things that I actually know something about." Because if I tried to tell them what a cocoa expert I was, these are smart people, they would have sniffed me out right away.
Josh King:
They eat, live, and die cocoa.
Tom Farley:
Exactly, exactly.
Josh King:
So let's, then, fast forward. It's 2014, you're here at the New York Stock Exchange, there is a huge buzz, because there's about to be an enormous IPO of a Chinese company. Jack Ma and his team from Alibaba are roving around the world, doing their roadshow. Let's hear a quick news clip of what happened when they got to Hong Kong, and then we'll come back to the floor.
Speaker 6:
So there you have it, a little bit of the air and the ambience here at the Hong Kong portion of the Alibaba global roadshow. Here, in my hand, is the prospectus for Alibaba. All of the investors here did receive this, and they're going to be doing a little bit of light reading to decide on whether they want to invest or not. From here, the roadshow goes on to London. And by the end of the workweek, on September 19, the New York Stock Exchange will start trading Alibaba under the ticker VAVA.
Josh King:
So Tom Farley, innovators from Tom Edison, to Jack Ma, have come to the corner of Wall and Broad to tap into the capital markets for centuries. When you are in the room with Jack Ma, or another CEO, what's your pitch to come here?
Tom Farley:
Great question. That was a fun one, by the way. Alibaba was so much fun. It captivated the attention the whole world. I walked in that morning, and I walked into a room just down the hall, and the first person I met was Jet Li, the Chinese martial arts actor. And the next person I met was Masa Son, who runs SoftBank. And then the person after that was Jack Ma, and I said, "Oh, geez, this is going to be a fun morning."
Tom Farley:
Our pitch is really quite simple. First of all, we never try to push a company to go public. We've been around 225 years, and whether they IPO this year, next year, or five years from now, that's irrelevant. When a CEO calls and says, "Hey, I could really use your help. Can we have a conference room for a board meeting," that's something that we're going to offer. Or, "Can I pick your brain about this issue that I'm wondering about," investment bankers, or lawyers, or SEC regulation, my team and I are always quick to take those calls. And I think that's been helpful.
Tom Farley:
I think the nitty gritty pitch is that you can list on the New York Stock Exchange, and we're going to execute your IPO really, really well. That's what we have a great track record doing. Your stock is going to trade with less volatility than it would on on other exchanges because of our combination of humans and technology. And you're also joining the greatest network of companies in the world.
Josh King:
2,400 strong.
Tom Farley:
2,400 strong, 40 trillion of market cap. The next closest exchange in the world is a tiny fraction of that. And those companies employ 45 million employees, and we're able to put our companies together using both art, science, and luck, in ways that that creates even greater business. Even this morning, we had a company that was having their IPO, they operate businesses in airports, and another gentleman was on the floor, who owns the concession to something like 75 airports. And just being able to put them together and see them brainstorming on ways they can work together, that happens day in and day out here at the stock exchange.
Josh King:
And so you were up there, at the podium, at that moment, at 9:30, about to ring the opening bell, you're standing next to the CEO, their management team. Behind the two of you, with great fanfare, the management team is all exhausted, because they've been on this national, and, oftentimes, global roadshow, selling their shares to fill their book of orders before it starts to trade. When the bell rings, and the action shifts to the floor, what happens during the process of price discovery?
Tom Farley:
In some ways, if you kind of rise up to 50,000 feet, you can look at it and say, "Well geez, it's really just a financial transaction, it's a way of bringing capital into the business, changing the shareholder base." But down at ground level, it's so emotional. It's always an important milestone, where women and men reflect back on all of the hard work that went into it, on all their committed colleagues, on their families that supported them, the advisors who believed in them, and more often than not, there are tears.
Tom Farley:
In fact, this morning, and I won't mention who it was, but the CEO of a very large IPO was weeping openly as they addressed the employees, before we headed down to ring the bell. And so to just be there with these great business leaders, raising capital that they can go deploy, and prove outcomes for people all around the world, and being a part of that emotion is great. But then, we ring the opening bell, that iconic opening bell that your listeners know so well, we go down, and we open the stock. And that's where the beauty of the human interaction is. And visitors to the exchange love to see this, because that's where you get a little bit of that old fashioned open outcry, where the independent floor brokers are hollering back and forth with the designated market maker, who's coordinating with the upstairs banker. It's this complicated ballet, and the goal is to find a smooth price.
Tom Farley:
Typically, it only takes about a half hour. This morning, it was an hour and 10 minutes. That's, quite frankly, unimportant, although it can be a little annoying for the TV stations that are covering in, when is it going to open? But then inevitably, we open it, and the price finds its level, and the company... away they go. They go back to work, they go back to improve their business.
Josh King:
So six and a half hours later, it's 4:00 PM, trading day is about to conclude. Again, that process... we revisit that process of closing the day's trading, and what makes for these 2,400 listed companies, makes the New York Stock Exchange so unique is the human element, as well. What makes the particular aspect of the closing auction at the NYSE unique, especially given all these passive investing strategies, and the rise of exchange traded funds?
Tom Farley:
Yeah, that's a great question. It's a really interesting trend. When I got here, around about five years ago, the close was only a couple, let's call it 3.5% of the total volume for the day. Now that figure is closer to 6%. In fact, it's slightly north of 6% for New York Stock Exchange listed securities. And that largely is because of this rise of passive investing. Passive investing now accounts for about 30% of all dollars invested in the United States. By and large, it's done through very low cost providers. And so this is generally a good a good societal development. But the close has become even more important, because those passive funds are inevitably tied to the closing price. And so that closing auction is critically important.
Tom Farley:
The interesting thing to me was I figured, okay, an auction is an auction is an auction. No, there's a whole theory and science to auctions, and how you develop them, and when you're transparent versus opaque, and how you modulate between opaque and transparent. Fortunately, we have some incredible people here. Stacy Cunningham, our Chief Operating Officer, who really is everyone's boss, including mine, when it comes to trading, and Michael [inaudible 00:35:58], and others, who are constantly evolving the auction as the market changes, such as with increasing passive activity to make sure that is the moment that is the most liquid, that is the cheapest, most efficient way for our customers to be able to express price, more so than at any other point in the day.
Josh King:
Just this week, now we're talking about what happens like between 9:30 and four o'clock, day in day out. Just this week, one of your oldest listed companies, Coca-Cola NYSE symbol KO, decides to come to Experience Square to unveil four new varieties of Diet Coke, and they ring the opening bell, and they're here all day, and they're letting passers by taste all of the new flavors. What's the ongoing relationship with some of your... really, all of your companies, and the way they use the exchange day in day out, month in month out, during the year, having nothing to do with the day they list or trading?
Tom Farley:
So we had Coke Cola, and yet again, for their creatively designed new Diet Coke cans. And they are nearly 100 years. You said they're one of our longest listed. And in fact, in a manner of speaking, that's true. Our longest listed is now close to 200 years. They're lagging Con Edison by by nearly 100 years. But many, many companies come back over and over again, and this goes back to what I was talking about. Coke coming in, pulling a truck up in front of Experience Square, and a banner on the on the façade, ringing the bell. We just do that for our great list of companies, and they come back, not just for promotional events, but recently, we had [inaudible 00:37:43] and MasterCard here for a board meeting, SAP was in... Pardon me, investor day. SAP had investor day, US Bancorp for their board meeting, SunTrust for the for their board meeting. On and on and on.
Josh King:
You got great spaces in this building.
Tom Farley:
No, we love it, we love it. And they like it, because then they can do publicity, and do a number of interviews with the media-
Josh King:
CNBC, at post eight?
Tom Farley:
Yeah, CNBC broadcasts I think five hours a day, here it may be-
Josh King:
Post nine, sorry.
Tom Farley:
... it may be slightly less. But Fox Fox Business broadcasts throughout the day, CBS, many, many others. Chatters is an upcoming network targeted at millennials.
Josh King:
Companies like them are also relying on the president of the New York Stock Exchange to bring the message of free enterprise down to Washington, DC, arguing for improvements in the capital markets system, a better regulatory environment to keep pace with other countries. You are in constant contact with the SEC, you've testified before Congress, you've had meetings with President Trump. What is happening right now in Washington, DC, in your view, especially having come back from Davos, to change the landscape for getting business done in the United States?
Tom Farley:
There's a lot that's going on. The one I'll focus on is deregulation. President Trump brought in a gentleman named Jay Clayton as the chair of the SEC. One of the very first things Jay Clayton did was he enabled, with a stroke of a pen, companies to file to go public without disclosing that to everyone on the website. Basically, what that did was it allowed companies who aren't sure they're going to go public, but want to prepare for it, to file for that IPO in a way where they don't have to worry about their competitors seeing that information. I call that deregulation.
Tom Farley:
What it really is, is smarter regulation. And we're seeing that in every industry, we're seeing regulators promulgate fewer regulations, and that's in every industry. CEOs I'm talking to from all around the world, who compete here in America, are seeing that. And the improvement of old regulations that were stifling business and weren't particularly helpful to investors or consumers.
Josh King:
ICE and the NYSE will be here a year from now, they'll be here 10 years from now. How do you think trading changes 10 years from now, and how should it change?
Tom Farley:
The one thing I know is, it will look different. It'll be aided by a different technology, and there will be different products. When I was entering college, there was no such thing as an ETF. It didn't exist. And now, 25 years later, there's $3.4 trillion in ETFs, most of which listed here in the New York Stock Exchange. This is a sophisticated tool for investing, and for managing risk that really, something like it would have, historically, only been the exclusive province of the most sophisticated traders. And now, my father, retired federal judge in Bowie, Maryland, who's managing his life savings, can invest in a broad based low cost ETF to be able to get appropriate exposure to the market.
Tom Farley:
So will it look differently? 10 years from now? Without question. I just look at the evolution of the market over the prior 10 years. But we, at the stock exchange, and at Intercontinental Exchange, are going to be doing the same thing we've always done, we're going to help entrepreneurs raise dough, and we're going to trade the securities of their stock, using the best available, most efficient technology.
Josh King:
In the meantime, Tom Farley, we'll have those entrepreneurs, and visionaries, and leaders on this show to continue sharing their dreams as they continue raising money to the NYSE. Thanks very much for joining us.
Tom Farley:
Thanks so much. Thanks so much, Josh.
Josh King:
That's our conversation Inside the ICE House for this week. If you liked what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, tweet at us at NYSE. Our show was produced by Pete Ash and Ian Wolf, with production assistance from Ken Abel. I'm Josh King, your Host, signing off from the Library of the New York Stock Exchange, thanks for listening, see you next week.
Speaker 7:
Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates make any representations or warranties expressed or implied as to the accuracy or completeness of this information, and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, or a solicitation of an offer to buy any security, or recommendation of any security or trading practice. (silence).
