Canadian Leads Charge to Take NYSE Public

Shortly after Thomas Caldwell bought his first seat on the New York Stock Exchange for US$2 million in August 2003, he received a call from Richard Grasso, then the exchange's chairman, thanking him for establishing a new high for NYSE seats.

Canadian Leads Charge to Take NYSE Public

Shortly after Thomas Caldwell bought his first seat on the New York Stock Exchange for US$2 million in August 2003, he received a call from Richard Grasso, then the exchange's chairman, thanking him for establishing a new high for NYSE seats. Caldwell, a Toronto investment broker, replied jocularly that it was his job to make other people rich. Within weeks, a scandal erupted over Grasso's $187-million pay package, Grasso resigned, and the value of an NYSE seat plummeted. By January of this year, as the controversy over Grasso's pay lingered and a new NYSE scandal over trading fraud emerged, the value of a seat stood at $975,000, less than half what Caldwell had paid. That was the low. With an audacious campaign to take the NYSE public, led in large part by Caldwell, prices have rebounded. At the end of last week, a seat was going for a new high of $3.25 million - the price Caldwell paid, on a last-minute buying spree, to pick up his 40th one. And if the TORONTO STOCK EXCHANGE is any precedent, it's money well spent.

A headstrong scrapper and chairman of one of Canada's few independent brokerage firms, Caldwell has long been a maverick on Bay Street. But at 62, he's been relatively quiet of late, leading some to think he was preparing to retire. Wrong. He's had his sights set on Wall Street and the symbolic centre of American capitalism, the New York Stock Exchange. This battle now is his biggest ever: to convince other seat-holders to approve a merger between the NYSE and the Chicago-based electronic exchange, Archipelago Holdings Inc., and become a publicly traded, for-profit company. The deal, if approved in a members' vote on Dec. 6, will transform the 213-year-old exchange from an anachronistic old boys' club into a modern, externally regulated corporate entity. Other exchanges, including Toronto and London, have already gone this route. Instead of seat-holders, the NYSE's owners will be shareholders, able to buy and sell its stock just like any publicly owned company. And Caldwell, who's been pushing for these changes, stands to make a killing.

His model is the Toronto Stock Exchange, which went through a similar exercise starting in 1998 - one that Caldwell, ironically, fought tooth and nail. That time, he lost. "I was clearly wrong," Caldwell says now. "I didn't get it." Now he does. Prior to the transformation in 1999, a TSE seat sold for about $50,000. When the TSE went public, seat-holders received $5 million each in compensatory shares. Caldwell estimates they're now worth $21 million, and calls it "probably the biggest play in the 40 years I've been involved in the securities business." In the heat of the TSE battle, Caldwell mocked its leaders for suggesting the co-operative structure that had served the exchange well for many years no longer worked. "That could be a shock to the lads at the NYSE," he said at the time, referring to the New York exchange's power and strength.

What was a shock to the lads was when Caldwell proposed they drop their old boys' structure. In January 2004, he wrote his first letter to fellow NYSE members. The exchange "is caught in a unique and ongoing quandary," he wrote. While it is a "non-profit, quasi-regulatory 'utility,' " it needs to compete to survive, and the only way to do that would be to become for-profit and publicly traded, he said. "Exchanges are monster cash generators, if done right," he told Maclean's. "And the NYSE is a brand name in this business. It's like buying Coca-Cola before it goes public, as far as I am concerned. It's amazing how many people did not see this."

He then campaigned among the seat-holders, sending numerous letters and holding many meetings. He canvassed members and directors, at first encountering much opposition. "We were the barbarians at the gate," he says. But the Canadian, as he is known, recognized that the push back came from the seat-holders' gut instincts. He'd felt the same way when the TSE proposed its new structure. Caldwell's licence plate still reads TSE 43, the clearing number from the day he bought his Toronto seat in 1980. Being a member of the TSE was, as he puts it, "part of who I was. I was in a mind block in exactly the same manner as the NYSE people were. I enjoyed belonging to the club. So I fought change." And, he adds, "New York, quite frankly, is a very parochial city. It's probably the most provincial environment I've ever been in. If it hasn't happened in New York, it just hasn't happened."

But slowly, seat-holders, many of them retirees who lease their seats to active traders, have been climbing onside. While not the only advocate for a modern structure, Caldwell has been a primary force behind the changes. "I talked to everyone. I gave everybody the respect that at least they were doing the right thing in their minds." In April 2005, the Big Board's new management under John Thain announced the Archipelago deal, providing the sort of platform the NYSE needed to become public and for-profit. The merger offers 70 per cent of the new entity to the 1,366 NYSE owners, and 30 per cent to Archipelago's current shareholders. Caldwell doesn't expect NYSE shares to experience the same sort of increase the TSE enjoyed, but over time, with more potential mergers down the road, he suggests the value of a seat could be worth $9 million.

Not every seat-holder is happy with the deal, which needs two-thirds approval. But perhaps clearing the last pre-vote hurdle, the NYSE last week settled with 10 seat-holders who were in court seeking an injunction against the Dec. 6 vote. Led by William Higgins, the dissidents fear that the 70-30 split is not good enough for the NYSE's owners. Part of the settlement in the case is a new independent opinion on the fairness of the NYSE-Archipelago deal, due to be delivered this week.

Meanwhile, Caldwell, who has been nominated to be a member of the NYSE board, continues to acquire new seats. He bought five early last week at $3.025 million each and then his 40th on Thursday, making him one of the three largest seat-holders of the NYSE, alongside trading specialist LaBranche & Co. and banking giant UBS. "In our industry, there's nothing wrong with being wrong," Caldwell says of his opposition to the conversion of the Toronto Stock Exchange six years ago. "But there is something wrong with staying wrong." After Dec. 6, he'll know for sure if he's right.

Maclean's November 28, 2005