2007 October 14 Sunday
New York City No Longer Center Of Finance?

Daniel Gross, writing for the New York Times Magazine, reports signs that New York City is rapidly ceasing to be the preeminent financial capital of the world.

Some of the trends highlighted in these reports are troubling for the United States financial-services industry and for New York, its spiritual and historical home. The Committee on Capital Markets Regulation noted that the U.S. share of global initial public offerings — those outside the company’s home country — fell from 50 percent in 2000 to 5 percent in 2005. Until recently, the directors of China Construction Bank would have seen no alternative to a New York offering. Only New York had the experienced underwriters, the highly transparent, trustworthy markets and the deep pool of capital to handle such a deal. That’s no longer the case. In 2001, New York’s stock exchanges accounted for half of the world’s stock-market capitalization. Today, the total is more like 37 percent. In 2005, 9 of the 10 largest I.P.O.’s took place outside the United States. The world’s largest-ever I.P.O., the $19.1 billion offering of Industrial and Commercial Bank of China, was staged in Hong Kong in 2006. In the lucrative field of investment banking, sales and trading revenues, the McKinsey report concluded that “European revenues are now nearly equal to those in the U.S.”

Part of this is driven by technology. Trading floors are getting replaced by totally automated computerized trading. The buyers and sellers still exist scattered over many cities and countries as they always were. But there is less need for traders at the center making a market in securities. Automation is reducing labor needs. But also communications and computing technologies are reducing the need for concentrations of workers to enable them to come into close physical proximity with each other.

New York City has a great deal to lose from outsourcing.

What does all this diffusion mean for New York’s economy? Potentially, a great deal. Steve Malanga, senior fellow at the Manhattan Institute, estimates that there are 175,000 securities-industry jobs in New York, which pay an average wage of $350,000. The Committee on Capital Markets Regulation notes that the securities industry accounts for 4.7 percent of the jobs in New York City but 20.7 percent of the wages. But the impact is even larger, since the spending of Wall Street hotshots supports a huge number of other jobs. Between 1995 and 2005, the sector grew at an average annual rate of 6.6 percent in New York and provided more than a third of business income-tax revenues, according to McKinsey.

Will the high income jobs leave New York City? Will financial work diffuse across many more countries and cities?

The high cost of doing business in New York combines with technologies that eliminate the need for close physical proximity. The result is that new companies can start up in lower cost locations and rapidly grab big chunks of market share away from NYC-based companies.

Because of the high costs of living and doing business in New York, the city is likely to continue to lose market share. Take the case of BATS, an alternative trading platform based in Kansas City, Mo., that has come out of nowhere to gain a 9 percent share in the market for trading United States stocks. “Our location is one of the principal factors that enabled us to go from start-up to the third-largest equities exchange in the U.S. in a matter of 18 months,” says Joe Ratterman, its president and chief executive officer. The company’s computers reside in a New Jersey data center, and it has two sales representatives in New York. But the rest of its 33 employees work out of a 10,000-square-foot office complex with views of downtown Kansas City.

Think about that. 18 months from start-up to 9 percent market share. New York City's financial worker employment could suffer shrinkage far more rapid than what happened to the smoke stack manufacturing industries back in the 1970s and 1980s.

Gross speculates that New York City can still survive by becoming a services economy which caters to the needs of the super wealthy. The city still has the lawyers, accountants, investment bankers, and other skilled workers that allow complex deals to get put together in face-to-face meetings. But anything automated strikes me as better done in lower cost locales.

Share |      By Randall Parker at 2007 October 14 11:47 AM  Economics Financial

Wolf-Dog said at October 14, 2007 2:52 PM:

London Stock Exchange, is gaining ground because a lot of international companies are offering their IPOs over there instead of in the US. However, if you read the fine print more carefully, then you will see that many of these new IPOs are much less regulated and less scrutinized than in America. In the United States, many of these IPOs would NEVER be approved by the SEC. This is happening because the markets rallied very well during the last few years(especially outside the U.S. markets since 2003, as foreign markets bounced and rallied far better), and as a result, the dotcom (or rather, dotcon) bubble has been forgotten or at least forgiven in view of the new examples of international stocks that have rallied much more than 10,000 % outside the US. It is known (but forgiven) that most Asian stocks who are leading this new rally, are as unprofitable as the dotcoms of the late 1990s. Thus perhaps it is not a terribly sad tragedy that the new stock market boom is not in New York City.

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