AlbanyMIT PhD Colloquium Adaptive and Deliberate Change in Organizations Evidence from the New York

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

• Purpose of the dissertation
• Methods
• Case study the New York Stock Exchanges 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

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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

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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.

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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

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3. NYSE Case Study Reference Mode
Buyer
Seller
Computer
Broker /Brokerage House
Broker /Brokerage House
The Trading Floor
Specialist(Post)
Floor Broker
Floor Broker
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3. NYSE Case Study

• Case study the New York Stock Exchanges 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
  behaviorsquick adaptation, punctuated
  equilibrium, and non-change.

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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
MGMTs 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
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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

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3. NYSE Case Study Exogenous perspective of
adaptation to environmental forces
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3. NYSE Case StudyEndogenous 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.

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3. NYSE Case StudyEndogenous pressures by
stakeholders
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3. NYSE Case StudyManagement Influence
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3. NYSE Case StudyManagement Influence
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3. NYSE Case StudyManagement Influence
Adaptation, Culture and Resistance, and Mgmt
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1
1
2
5
5
5
1
Dmnl
4
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
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5
5
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4
4
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
"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
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Theoretical possibilitiesin the implementation
of e-trade
Fraction of e-trade at NYSE
Market share of NYSE
quick adaptation
punctuated equilibrium
non-change
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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.

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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

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• Backup slides

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(No Transcript)
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• 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?

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

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Stage 2 Reference ModeSpecialist 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.

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Data Collection

• On a continuing basisNewspaper
  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.