Albany-MIT PhD Colloquium Adaptive and Deliberate Change in Organizations – Evidence from the New York Stock Exchange

1. Albany-MIT PhD Colloquium Adaptive and Deliberate Change in Organizations –Evidence from the New York Stock Exchange April 25, 2008 Nici Zimmermann

2. Presentation Outline • Purpose of the dissertation • Methods • Case study: the New York Stock Exchange’s move towards electronic trading and the Hybrid Market • Exogenous perspective of adaptation to environmental forces • Endogenous pressures by stakeholders • Management influence • Implications for a generic institutional change model • Smaller, generic system dynamics model • How you can help me

3. Briefly about myself • Student of Peter Milling from the University of Mannheim in Business Administration • Interest: Organization Theory, Organizational Change • Visiting student at the University of Albany in Public Administration and Policy • Phone call with all my Albany supervisors and Peter Milling • Goal: finish the dissertation by the end of this year • Seeking your help in finishing and going beyond • Connection to the literature • Weight of the case study in my dissertation, importance of generic model • Where to publish

4. 1. Purpose of the Dissertation • Shed light into the discussion of the prevalence of the environmental/ technological vs. the organizational imperative (deterministic adaptation vs. deliberate change) • Do this with the help of a system dynamics model that is able to create • quick organizational adaptation to exogenous change, • punctuated equilibrium, • and non-change and organizational death. • This is done by changing • pressures from stakeholder groups (strength and size through exit), • the degree of inward orientation of the management board, • and the degree of customer orientation.

5. 2. Methods • Data collection • Literature • Journal Articles • Magazine and newspaper articles about the case study • Quantitative time series data from the New York Stock Exchange • Interviews for face validity • Ethnographic analysis of the NYSE blog • System dynamics modeling and system dynamics validation methods

6. 3. NYSE Case Study: Reference Mode Fraction of largest foreign NYSE competitors that enable some e-trade Fraction of electronic trading at the NYSE Buyer Seller Computer Broker /Brokerage House Broker /Brokerage House The Trading Floor Specialist(Post) Floor Broker Floor Broker

7. 3. NYSE Case Study • Casestudy: the New York Stock Exchange’s move towards electronic trading and the Hybrid Market • Exogenous perspective of adaptation to environmental forces • Endogenous pressures by stakeholders • Management influence • Build up these elements step by step, showing that they are all necessary to create the reference behavior. • Then I change parameters to show that this structure is also able to create different behaviors—quick adaptation, punctuated equilibrium, and non-change.

8. 3. NYSE Case Study CHARACTERISTICSOF MARKET - Market speed - Extent of e-trade in market PRESSURE FOR E-TRADE - From institutional customers and owners Deriving from relative NYSE speed Definesmarketshare (B) Institutional customers’ dissatisfaction with speed to execution Changes customerand mgmt composition MGMT‘s DECISIONON EXTENT OF E-TRADE - Market share - Customer orientation - Mgmt composition - Relative pressure MANAGEMENTCOMPOSITION - Fraction ofinstitutional membersvs. non-institutionals (R) Inwardorientationof mgmtteam,CEO selectsmgmt (B) Customer pressures and resistance (R) Cultural pressures from stakeholders PRESSURE FOR FLOOR TRADE - From non-institutional customers and owners Deriving from bad market quality - From floor-based firms As cultural pressure from stakeholders As resistance from stakeholders

9. 3. NYSE Case Study: Exogenous perspective of adaptation to environmental forces • Organization easily adapts to pressures building in its environment • Rise of institutional customers from the 1950s to 1990s and beyond • Technological developments up to “arithmetical miracles” •  pressure for electronic trading from institutional investors who want to do algorithmic trading

10. 3. NYSE Case Study: Exogenous perspective of adaptation to environmental forces Adaptation, Culture and Resistance, and Mgmt 1 2 5 1 Dmnl 2 1 1 Dmnl 1 Dmnl 1 Dmnl 2 1 0 Dmnl 0 Dmnl 0 Dmnl 2 1 0 Dmnl 2 2 3 4 5 2 3 4 5 1 3 1 1 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Time (Year) "Fraction of E-Trade in Remaining Market" : 2008.04.24 exogenous adaptation Dmnl 1 "fraction of e-trade" : 2008.04.24 exogenous adaptation Dmnl 2 2 2 2

11. 3. NYSE Case Study:Endogenous pressures by stakeholders Specialist have a strong culture based on past successes. They oppose electronic trading because it undermines their earning capabilities. One specialist who used to be a member of the board now wears stickers showing his opposition to the changes. But he is completely powerless. People with institutional interests (e.g. traders working for large banks) outweigh the specialists, so their opposition has no effect any more.

12. 3. NYSE Case Study:Endogenous pressures by stakeholders Adaptation, Culture and Resistance, and Mgmt 1 1 2 1 2 1 2 1 2 2 5 5 3 5 5 4 3 4 5 3 4 1 Dmnl 3 4 2 1 3 1 Dmnl 1 Dmnl 3 1 Dmnl 2 1 3 0 Dmnl 0 Dmnl 0 Dmnl 2 1 0 Dmnl 3 2 2 3 4 5 2 3 4 5 1 3 4 5 4 4 1 1 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Time (Year) "Fraction of E-Trade in Remaining Market" : 2008.04.24 exogenous adaptation Dmnl 1 "fraction of e-trade" : 2008.04.24 exogenous adaptation Dmnl 2 2 2 2 "fraction of e-trade" : 2008.04.24 endogenous pressures Dmnl 3 3 3 3

13. 3. NYSE Case Study:Management Influence

14. 3. NYSE Case Study:Management Influence Adaptation, Culture and Resistance, and Mgmt 1 1 2 2 5 5 1 Dmnl 3 2 1 3 1 Dmnl 4 5 1 Dmnl 3 1 Dmnl 2 1 4 3 0 Dmnl 0 Dmnl 0 Dmnl 2 1 0 Dmnl 3 2 3 4 4 4 1 1 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Time (Year) "Fraction of E-Trade in Remaining Market" : 2008.04.24 exogenous adaptation Dmnl 1 "fraction of e-trade" : 2008.04.24 exogenous adaptation Dmnl 2 2 2 2 "fraction of e-trade" : 2008.04.24 endogenous pressures Dmnl 3 3 3 3 "fraction of e-trade" : 2008.04.24 base Dmnl 4 4 4 4 4 4

15. 3. NYSE Case Study:Management Influence Adaptation, Culture and Resistance, and Mgmt 1 1 2 2 5 5 5 1 Dmnl 3 4 2 1 3 1 Dmnl 4 5 1 Dmnl 3 1 Dmnl 2 1 4 3 0 Dmnl 0 Dmnl 0 Dmnl 2 1 0 Dmnl 3 5 3 4 5 4 4 1 1 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Time (Year) "Fraction of E-Trade in Remaining Market" : 2008.04.24 exogenous adaptation Dmnl 1 "fraction of e-trade" : 2008.04.24 exogenous adaptation Dmnl 2 2 2 2 "fraction of e-trade" : 2008.04.24 endogenous pressures Dmnl 3 3 3 3 "fraction of e-trade" : 2008.04.24 base Dmnl 4 4 4 4 4 4 "fraction of e-trade" : 2008.04.24 only mgmt and institutionals Dmnl 5 5 5

16. Theoretical possibilitiesin the implementation of e-trade Fraction of e-trade at NYSE Market share of NYSE quick adaptation punctuated equilibrium non-change

17. Important Parameter Changes … • … concerning the NYSE case and the general implications: • Internal dynamics around specialist culture: • Ability of floor-based firms / stakeholders to exit • Cohesiveness of the floor-based firms / of stakeholders • Management dynamics: • Effect of market share on customer orientation • Power of CEO to select management • These parameters are able to create • Quick organizational adaptation, • Punctuated equilibrium, • And non-change and organizational death.

18. Discussion • Thank you very much for your attention as well as for your suggestions! • Literature • How do I best fit this with the literature • Organizational Change • Punctuated Equilibrium • Determinism vs. deliberate change (exogenous vs. endogenous) • Technological/environmental vs. organizational imperative • Weight of case study • Importance of generic model • Where to publish, what audiences? • Other ideas to move forward

19. Backup slides

21. What would have happened if the specialists’ culture had been less strong or stronger? • If specialists had not left or had not had the opportunity to do so? Or had left more rapidly? • If the specialists had been more cohesive?

22. Conceptualization and Formulation Stages Randers, Jorgen (1980):Elements of the System Dynamics Method, p. 135.

23. Definitions and History • Specialist • A market maker (person) who matches buyers and sellers for a specific kind of stock at the New York Stock Exchange. When the customer orders do not match, he steps in with his own shares and capital. • E-Trading (electronic trading) • Trading in which a computer matches buyers and sellers. The specialist is not involved or needed any more. • History • E-trading was possible since the 1980s. It got implemented at the New York Stock Exchange (NYSE) to a small extent in 2001 and to a larger extent from 2004 on.

24. Stage 2 Reference Mode:Specialist Participation in Trades • From 1960 till 1997 the participation of the specialist in trading declined from 16% to 9%. • With the implementation of electronic trading in 2001 it plummeted. • The increase in participation from 1997 till 2001 may be due to the increased volatility from the technology boom.

25. Data Collection • On a continuing basis:Newspaper articles,Journal articles if available. • Beginning of November: First two interviews with students who did an internship at the New York Stock Exchange last summer. • Nov. 14: Meeting with John Malitzis, Vice President of Specialist Surveillance • Afterwards (hopefully soon) I want to conduct interviews with specialists and other people working at the Exchange.