Rim Shot : Pacific Stock Exchange Aims to Trade Up to Role as Finance Gateway to Asia

Like many of the nation’s smaller securities exchanges, the Pacific Stock Exchange has struggled for years to establish a name for itself with investors.

“Most people don’t know we’re here,” said PSE Chairman Robert M. Greber, looking out at downtown Los Angeles from the PSE’s mammoth white building overlooking the Harbor Freeway.

Greber hopes all that is about to change.

The 115-year-old exchange is positioning itself for the next millennium with grand plans to become a financial gateway not only for the West, but also the entire Pacific Rim.

This week, the exchange--with trading floors in both Los Angeles and San Francisco--takes its first major step to the Far East. It will begin offering options trading on the Dow Jones Taiwan Stock Index, a broad-based average of the 117 most liquid stocks on the Taiwan Stock Exchange, one of the most difficult Asian exchanges for foreigners to gain access to.

The PSE is also hoping to get regulatory approval for an “Asian Board,” a U.S. marketplace devoted to trading securities of smaller Asian companies that may not now trade on other U.S. markets.

“We can create a London, a Wall Street, here in California,” said state Treasurer Matt Fong, who is traveling to Asia with Greber this month to promote that idea. “We’re already known as a Pacific Rim trading center. Now we can take it to the next level and become the financial center. The PSE is a key part of that.”

The Pacific and other regional exchanges, once designed for local stocks, now trade many of the same stocks as larger exchanges. In fact, local stock trading is a minor part of their business today.

The exchanges have carved new niches for themselves even as the New York exchanges have become huge international marketplaces. Many brokerages have seats at the smaller exchanges to take advantage of their speed, different trading hours or links with major local customers or the exchanges’ specialized businesses--such as options, which offer a low-cost way to either bet on stock price moves or to hedge against such moves.

Many brokers also like regional exchanges in part because it keeps the NYSE from establishing a monopoly.

Among the PSE’s innovations have been trading of very small California company stocks--which hasn’t taken off--and trading in Southern California smog credits, which appears to be a success.

Whether links to Asian markets can help the PSE create a stronger identity for itself remains to be seen, but PSE officials believe there is a large market of wealthy Asian investors in California who want increased access to securities in countries they are familiar with.

The PSE--owned by its member brokerages--is also trying to strengthen its identity as more entrepreneurial, more technology-driven and more flexible than its more established New York counterpart. Indeed, in the late 1960s, the PSE was the first exchange to introduce automated trading.

“We’re the gadfly among stock exchanges,” said Greber, a former Merrill Lynch executive and former CEO of Lucasfilm, the entertainment firm. Greber became PSE chairman last year, replacing Leopold Korins.

The PSE’s image and balance sheet have improved steadily in recent years as its options exchange has more than doubled in size to become the fastest-growing in the world. The PSE is more profitable than the three other major regional exchanges--Philadelphia, Boston and Chicago--according to PSE spokesman Dale Carlson.

After several weak years, the PSE has just posted two of its most profitable years, buoyed mostly by stocks’ continuing bull market and booming options trading.

In 1996, the PSE traded 2.9 billion shares, with an average daily volume of 11.4 million--still very small compared with the NYSE, which averaged 412 million shares a day.

The PSE’s growth in 1996 comes on the heels of a record year in 1995, when the exchange earned $10 million on revenue of $56.8 million, a 21% increase from the year before. Options volume increased 48% in 1995. Data for 1996 aren’t yet available.

The PSE got a big boost in 1995 when San Francisco-based brokerage Charles Schwab & Co. took over membership posts vacated by Merrill Lynch & Co. and became the largest seat holder on the exchange. East Coast brokerages Legg Mason Wood Walker and Raymond James & Associates have begun trading on the PSE in the last two years.

“Schwab has always been a supporter of regional stock exchanges,” said Sid Dorr, head of trading for Schwab. “Competition among the listed exchanges helps make sure trades are executed in ways that are best for our clients. Many of our customers have also been active in the options area.”

Because of growth, the PSE now needs to double the size of its options trading floor by the year 2000 and move its San Francisco headquarters, probably elsewhere in the city. The PSE’s large Los Angeles trading floor--where mostly stocks are traded--will stay put.

Just four years ago, a seat on the PSE sold at a record low of $11,500, but a seat currently is priced at $164,000.

That’s a far cry from the 25-cent price for a PSE seat in the early 1970s, when the exchange was financially troubled.

The Pacific Stock Exchange dates back to 1882 when the Gold Rush helped create the San Francisco Stock and Bond Exchange. In Los Angeles, the Los Angeles Oil Exchange was formed in 1899. The two merged in 1956.

In the early 1970s, regional exchanges accounted for only about 5% of consolidated trading activity in America. That began to change in 1975 when Congress forced brokerages to trade stocks at the best price, no matter which exchange offered that price.

Now the regional exchanges account for about 20% of all trades, Carlson said.

Although the PSE membership is happy with the exchange’s growth, the PSE’s plan to link with Asian markets isn’t universally applauded. Several traders on the floor of the exchange, who did not want to be named, said the plans sounded like another PSE marketing gimmick.

Still, Carolyn Whitfield, an analyst who follows Asian mutual funds for Morningstar Inc., the Chicago mutual fund data tracker, said plans to trade options on Asian indexes, particularly the Taiwan index, could become popular, especially with individual investors.

Dorr, at Charles Schwab, called the Asia plans a natural for the PSE given its time zone advantage over the East Coast.

Nicholas A. Giordano, president of the Philadelphia Stock Exchange, agreed that the PSE’s proximity to Asia is an advantage, although a small one. “Maybe it gives them a 10% to 15% edge,” he said. “But whatever edge you have, you need to exploit.”

Although there is speculation that the Internet will someday allow trading that bypasses all exchanges, the PSE’s Greber is doubtful.

“Just wait till you buy your stocks in cyberspace and the securities you get are bogus or the check your company gets bounces,” he said. “The idea that we’re going to do away with exchanges completely is naive.”

“We will always exist because we have a purpose,” Greber said. “Whether or not we have trading floors has yet to be seen.”