South-Western College Publishing - Economics  
NYSE Goes Electronic; Substitutes Capital for Labor
Topic Production and Costs
Key Words New York Stock Exchange, Archipelago Holdings, electronic trading, labor, capital, costs.
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Reference ID: A154119272

News Story To remain competitive with other trading exchanges, the New York Stock Exchange announced that it will permanently lay off 500 traders, or about 1/6 of its labor force. Such a move will save the exchange about $80 million annually-a hefty contribution towards the $200 million in costs that the Exchange has been trying to eliminate since it merged with Archipelago Holdings in March 2006. After the merger with Archipelago, the NYSE became a publicly traded company.

By reducing its work force, the NYSE is moving farther towards electronic trading, which the merger with Archipelago was designed to do. The Exchange will maintain what it refers to as a "hybrid" trading system featuring both manual and electronic trading. The NYSE also seeks to merge with the Paris exchange Euronext, which has extensive electronic trading capabilities.

Analysts suggested that the labor cuts were necessary and long overdue; many other exchanges, such as the NASDAQ, are already highly electronically oriented and thus more efficient to use. Analysts felt that the layoffs and increased reliance on electronic assets simply allow the Exchange to become more efficient. In fact, most people who follow the markets expect more labor cuts as the Exchange moves farther toward an electronic trading system.

Discussion Questions:
1. Is this an example of a long-run or short-run expansion? Why?
2. In this example, what is the relationship between increasing marginal productivity of NYSE workers and increasing returns to scale?
3. As the NYSE relies less on labor input and increases its reliance on technology, what will happen to its average cost curves and marginal cost curves? Why? Indicate this with a graph of these cost curves.
Multiple Choice/True False Questions:
1. Falling average costs in the long run is referred to as
  1. Decreasing returns to scale
  2. Increasing returns to scale
  3. Constant returns to scale
  4. Diseconomies of scale
2. True/False. Increasing efficiency like this will force the NYSE to raise its fees for transactions.

3. Increasing technology and reducing labor input like this will cause average fixed costs to ------, and will cause marginal costs to -----.
  1. Increase; increase.
  2. Increase; decrease.
  3. Decrease; increase.
  4. Decrease; decrease.
Source de la Merced, Michael. "Big Board, Moving Toward Electronic Trading, to Lay Off 500." The New York Times, November 9, 2006.
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