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BUFFALO NATIVE'S ECLECTIC BACKGROUND IS ASSET IN FACING NYSE'S CHALLENGES

William H. Donaldson, the new chairman of the New York Stock Exchange, never lacked for ambition when he was growing up on Buffalo's West Side during the 1940s.

Even as a teen-ager, Donaldson showed a knack for business, launching ventures that ranged from selling pennants with the Nichols School logo to his classmates to running a home-maintenance business during his summer vacations.

"I had a father who said if you want a car, go get it, go do it," says Donaldson, who took over from the retiring John J. Phelan Jr. on Jan. 1. "Growing up in the '30s and '40s, I suppose you become entrepreneurial oriented."

That's a philosophy that Donaldson, 59, now is putting to the test as the top executive at the Big Board -- the very symbol of the nation's capitalist system -- as it grapples with a series of challenges.

Although the 200-year-old exchange remains the world's dominant financial market, it recently has been losing market share in the face of competition from automated trading systems that offer longer hours and less restrictive trading and disclosure rules.

And the NYSE's "continuous auction" trading system, where deals are conducted through specialists on the floor of the exchange who match buyers and sellers, is coming under fire from critics who say computerized networks might be more efficient than the face-to-face methods now being used.

Donaldson also says he wants to try to lure back individual investors, who were driven off by the 1987 crash and the "casino mentality" during the 1980s that created the impression the stock market was a place dominated by high-flyers out for short-term gains.

"The New York Stock Exchange clearly is no longer a monopoly. It's being nibbled at by all sorts of forces," Donaldson says. "It's in the midst of rapid change."

And the job of steering the exchange in those new directions falls to Donaldson, who grew up on West Delavan Avenue, the son of an Eastman Machine Co. industrial engineer.

"He's a relatively quiet person. He certainly doesn't get his strength by out-blustering people," says Chester G. Dann, a high school classmate and Donaldson's roommate at Yale University.

"He's really a regular kind of guy," says Charles Yeager, a local insurance executive and one of Donaldson's classmates at Nichols. "He's always been very much of an achiever. I think he's always been a great problem-solver."

That much was apparent during Donaldson's days at Nichols. He played football and hockey, as well as running track. Donaldson and his father also were constantly tinkering with his 1931 Ford Model A, says Nichols classmate Charles Larkin III of Eden.

Donaldson also dabbled in some of the jobs students typically take to earn some spending money; he had a paper route and worked for S.M. Flickinger Co. Inc. in its warehouse and as a truck driver. But he took his money-making ventures a step further than most.

Larkin remembers that, during their sophomore year at Nichols, he and Donaldson realized that the school didn't have any type of banner. So the two students went to a printer and had a Nichols logo put on pennants, which they then sold to their classmates.

During their senior year, Donaldson and Dann put together a company they called United Enterprises, which found work for as many as 40 or 50 students doing odd household jobs. "We did everything and anything anybody wanted," Donaldson says.

"We really had fun doing it, but we didn't make any money at it until he took over the books," says Dann, who now is the business manager at Nichols.

Was uncertain of career

Yet even then, Donaldson says, he wasn't sure what type of career he wanted. When he had to fill in a career ambition for his high school yearbook, Donaldson wrote that he wanted to be a lawyer, but only because he didn't have a good idea of what he really wanted to do.

In fact, after Donaldson left the U.S. Marine Corps in 1955 as a first lieutenant, he was convinced that helicopters were going to be the wave of the future, so he spent a year working for what is now Sikorsky Aircraft.

Even today, Donaldson still shows off his Marine background. He wore a pin with the United States and Marine Corps flags on the lapel of his dark-gray suit during an interview in his plush Wall Street office last week.

But Donaldson's career didn't really turn toward the business world until a friend's father told him that, while helicopters may have a bright future, there were a lot more opportunities on Wall Street.

So Donaldson headed back to Harvard Business School. About a year after graduating, he and two friends founded their own investment banking firm, Donaldson, Lufkin & Jenrette Inc.

He left the firm in 1973 to serve as an undersecretary of state to Henry Kissinger and then as special counsel to Vice President Nelson A. Rockefeller.

To Donaldson, Washington was a new challenge. "I've always felt that I wanted to do a number of things with my life," he says. DLJ "was up and going and it was getting somewhat repetitive. The call to duty was somewhat irresistible."

Five years in academia

And after Donaldson's days in Washington were finished, he wanted to try something else new. "I wasn't sure what the next step would be. I knew I didn't want to go back to Wall Street and be part of the firm," he says.

So he headed off to Yale, where he founded the university's School of Organization and Management. "It was an entrepreneurial chance. It was in a different medium. It was helping my alma mater," he says.

Yet after five years as dean of Yale's business school, Donaldson decided he was ready for yet another type of challenge, one where he wouldn't be responsible for a lot of people. So he started his own investment firm, Donaldson Enterprises Inc., in 1980.

Then last year, a nine-member search committee picked Donaldson to become the New York Stock Exchange's fourth full-time, paid chairman since the job was created in 1972. Financially, Donaldson didn't need the job, but it was a new challenge and a chance "to put a little bit back into the system, if you will," he says.

"To me, this was a chance to use this experience I had in a milieu that wasn't pure government," he says.

Indeed, Donaldson will have to draw on his experiences as a broker, diplomat and academic to guide the NYSE.

"I think his credentials are unusually strong for that position," says Raymond D. Stevens, a family friend and the chairman of Pratt & Lambert Inc., a Buffalo-based paint company. "That really gives him a wide-ranging area of expertise."

As the leader of the exchange, Donaldson says he sees himself more as a referee than a king who is to be feared by his underlings.

"I love the fun of getting people together and building something," he says. "I really believe that, in this day and age, no single person can really have all the ideas."

For now, one of Donaldson's main challenges will be to stop what he calls the "fractionalization" of the U.S. securities markets as investment opportunities become more international.

Just last year, the NYSE average daily trading volume fell 5.3 percent to 156.8 million shares, the lowest level since 1986, thanks partly to the business that has been lost to the foreign, regional and automated markets.

Its share of the action in its own stocks has slipped. Last year, the NYSE handled 66 percent of all transactions in its stocks and 82 percent of the total shares in those stocks worldwide, down from 69 percent and 84 percent, respectively, the year before.

Seeks more foreign listings

To help reverse that trend, Donaldson says he wants to work with federal regulators to loosen the requirements that now prevent many foreign firms from listing with the NYSE. Currently only about 100 foreign firms trade on the exchange.

Yet Donaldson says it is important to distinguish between the reasons for trades moving away from the New York exchange.

If they leave because investors can get a better price elsewhere, that's one thing. But if the trades leave because investors want to avoid the NYSE's disclosure standards, then Donaldson argues that the best interests of the customers won't be served.

"If we lose the critical mass of buyers and sellers coming together . . . we will have lost what is a unique market system," he says. "All of which will make the markets harder to regulate and less perfect."

Charles Trzcinka, an associate professor of finance and statistics at the University at Buffalo, agrees. "If you can give people a wide variety of shares to trade in, that's all the better," he says. "If I can deal with one exchange, rather than three, that's what I'm likely to do."

And while Donaldson says the NYSE's auction market can be improved, he argues that the system's flexibility, along with its ability to treat small and large investors equally, gives it a major advantage over its automated competitors.

Even so, Donaldson says the NYSE will respond to moves by other competing markets by experimenting with after-hours trading.

"We want to move toward longer hours here, just so long as the demand is there," Donaldson says. "Personally, I don't think there is the demand for the maintenance of this kind of market at 2 in the morning."

But if it might make the exchange better, Donaldson is willing to try it.

"He'd never back down from anything," high school friend Larkin says. "He was constantly looking for a way to do something better."

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