Behind the Market Structure

An Interview with NYSE President Stacey Cunningham

Q3 2021

From innovating new paths for companies to go public to rolling out cutting-edge technology for powering its daily average of 2.4 billion transactions, the New York Stock Exchange (NYSE) is a hub of activity focused as much on the present as on the future.

“This is the most exciting period of time in the capital markets industry in several decades. And we’ve been around a long time,” says Stacey Cunningham, President, NYSE, in an in-person interview with Shane Swanson, Senior Analyst in the Market Structure and Technology Group at Coalition Greenwich.

After all, the NYSE building on Wall and Broad Streets in Lower Manhattan “is right where our country was founded,” she points out.

“The first company that listed at the NYSE was the Bank of New York, founded by Alexander Hamilton to support his plan to get Congress paid. Since then, we've been such a big part of watching these companies raise money in the public markets to go out and change the world. That’s been our mission,” states the first woman to become President of the NYSE back in 2018.

Stacey Cunningham never dreamt of a career in the capital markets. “Back in the mid-1990s, I was studying engineering and didn’t expect to get into this industry,” she says. However, an internship with a trading firm on the NYSE led to a 10-year stint on the trading floor.

After a brief interlude away from the sector, she joined Nasdaq in 2007, where she rose to Head of Sales for U.S. Transaction Services before leaving to join the NYSE in 2012. In 2015, she became Chief Operating Officer before taking charge as President in 2018 and taking the helm of many of the innovations seen at the world’s largest stock exchange today.

“We believe strongly we exist for companies and their investors to come together. That’s at the core of what we do,” she states.

To be sure, companies have moved beyond the traditional initial public offering (IPO) to go public with special purpose acquisition companies (SPACs) and direct listings, which the NYSE introduced.

Beyond IPOs

“Companies have more choices than they've ever had before. A lot of that is driven by their reasons for going public,” says the NYSE President.

In the past, the primary driver was the need to raise capital to grow the business. The credibility of a public listing, having the currency to engage in mergers and acquisitions (M&A) or providing liquidity for investors and employees were secondary benefits, she points out.

“That's changed because there's so much access to capital in the private markets. Companies are going public for those other reasons as their primary goal now,” she says.

Indeed, the NYSE developed direct listings in concert with Spotify, the first company to go public via a direct listing in 2018.

Direct Listings

Unlike in the IPO model, where banks curate the offering and arrive at a valuation “that might not be reflective of supply and demand in the overall market,” direct listing offers two major benefits, explains Stacey Cunningham. One, letting the full liquidity of the market value the company on day one results in uninhibited price discovery and reduces the cost of capital. Two, there is democratization of access for all investors.

Direct listings on the NYSE have been among the largest opening trades in U.S. market history, besides being less volatile price discovery events, she observes.

SPACs

As for SPACs, which have gathered momentum since 2019—there were around 560 SPAC offerings in the first six months of 2021—they were originally devised for companies facing difficulties in using the IPO route. The real shift happened when experienced business leaders became sponsors of SPACs, she points out.

“People are really investing in those sponsors. For a company, what's appealing about an SPAC is they have more control. They can negotiate with a counterparty, and there's less market risk because you're technically negotiating an M&A deal,” she says.

Many SPACs, in fact, relied upon the safe harbor provision in M&As to provide forward-looking guidance. However, the Securities and Exchange Commission’s (SEC) observations on the applicability of this provision and the accounting of warrants in SPACs put the brakes on the market earlier this year. This, she believes, has led to a “healthy reset” with better-quality companies coming to the market.

Looking Ahead: Capital Raises in Direct Listings

Undoubtedly, the NYSE is continuing to innovate new paths to go public, such as capital raises in direct listings.

“The initial impetus for direct listings was to decouple capital raising from going public, since that was not the primary goal. But some companies want that to be part of the process. We worked with the SEC for 18-odd months and received approval at the end of last year to have a primary offering as part of a direct listing,” informs Stacey Cunningham.

The aim is to overcome the artificial constraints in IPOs where on the demand side, not all investors get allocations or, where they do, they don’t get the full size of the interest, while supply is restricted due to lock-ups.

“With the direct listing and capital raise, companies are saying, ’Let the market price it on the exchange [on listing].’ This allows the price discovery to happen without those artificial constraints,” she explains, adding that the NYSE is waiting for the right company and right moment to launch this.

Technology at the Core: Pillar Platform

Meanwhile, the NYSE’s multi-year initiative to upgrade its technology with the rollout of the Pillar platform couldn’t have been more timely, given the COVID-19 pandemic. Equity transactions are transacted on Pillar currently, and options will be rolled out next.

“Technology has to be at the core of everything we do. Our systems are so critical that you have to be prepared for whatever the markets might throw your way,” asserts Stacey Cunningham.

She adds: “Equity markets are much more fragmented today. A lot of price discovery is happening on the exchanges. That's a sophisticated risk-management exercise. And if the system doesn't perform the same under all conditions, they're going to price that risk in, which is going to lead to worse prices for investors. So it is critical to make sure that no matter what is happening in the market, the system is always as responsive as it is in quiet conditions.”

The scalable Pillar platform provides the most consistent exchange technology, she believes. This was evident during the extreme volatility triggered by the pandemic. “It was very rewarding to see how well the technology performed,” she says.

According to Cunningham, NYSE’s unique hybrid model combines technology, accountability, and human judgement. While automated technology ensures the exchange can processes the upwards of 356 billion messages received on peak days, the human interface provides accountability since every listed company has a designated market maker (DMM), who has “a higher obligation than any other market maker in the U.S. markets.”

“DMMs use technology to trade, but they also have a human being on the floor who is interacting with institutional brokers at point of sale. It’s the combination of those three components that creates the NYSE’s unique market model,” asserts Stacey Cunningham.

The model was tested when the NYSE closed its trading floor with work-from-home last year. “The DMMs still had their same obligations, they were just electronically meeting them. Our study showed that stocks still traded better than other fully electronic exchanges because of that accountability but not as well as when the trading floor was open. So there is value from both pieces,” she elaborates.

Leading on Sustainable Investing

Meanwhile, the NYSE is already ahead of the curve on other important investing trends: sustainable investing or ESG (Environment, Social and Governance) and DEI (Diversity, Equity and Inclusion). After all, the UN’s Principles for Responsible Investing were launched at the NYSE 15 years ago.

Apart from its own ESG commitments to its community and stakeholders, the NYSE’s parent aids informed ESG investments by collecting public company data on 500 criteria and 3,700 companies covering key ESG metrics. It packages this for investors, index creators, rating agencies, and even listed companies to use.

As for promoting diversity, the NYSE Board Advisory Council, launched a couple of years ago, is designed “to help change the diversity profile of corporate America by tapping into our CEO community, since board seats are mostly filled through referrals.”

So, what would she like to change in the industry? Says Cunningham: “One thing we have not done well as an industry is telling our own story. We need to make sure we tell the story of all the good that gets done when companies raise money. But it needs to be a story of shared success [with investors]. There is a lot of frustration with elements of our markets, which is getting manifested in different ways such as meme stocks. I think it's on us to tell that story a little bit better.”