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Appendix

Appendix A: Financial Glossary

auction market A market in which a market maker conducts an auction for specific securities and allows for negotiation over the price.

designated market maker A market professional who has the responsibility to pro-vide a fair and orderly market for the securities he has been assigned. He combines a physical and an automated auction that includes algorithmic quotes. His responsibili-ties are to bring together demand and supply and to quote at the NBBO a specified percentage of time.

designated order NYSE system which allows brokerage firms to electroni- turnaround (DOT) cally transmit orders directly to the specialist.

Direct+ A high-speed electronic system for immediate automatic execution of limit orders that was implemented at the NYSE in 2001.

DMM See designated market maker.

DOT Designated Order Turnaround. It is an electronic system that allows brokers to route orders directly to the specialist instead of a floor broker.

Financial Industry A private regulatory body governing the business be-Regulatory Authority tween brokers, dealers, and the investing public. It was formerly known as Securities Industry Regulatory Authority (SIRA).

floor broker Broker physically located on the NYSE trading floor who competes with other brokers to receive the best price for his customer.

institutional investor Financial institutions such as banks, insurance companies, investment funds, pension funds, proprietary trader organ-izations and else that frequently engage in securities trad-ing.

Intermarket Trading System that gives market professionals the opportunity to System send orders to other markets if these markets display a better price.

liquidity algorithm With the help of liquidity algorithms, the NYSE’s DMMs and Special Liquidity Providers are able to constantly pro-vide automated bids and offers also in electronic trading.

N. Zimmermann, Dynamics of Drivers of Organizational Change,DOI 10.1007/978-3-8349-6811-1, © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011

258 Appendix

market maker By providing a bid and an offer price, a market maker makes sure that a specific group of securities can always be traded.

NBBO National best bid and offer, the highest bid and lowest of-fer in the U.S. securities market.

order flow Incoming orders.

proprietary trader A firm trading with its own instead of the customers’ mon-ey.

SEC The Securities and Exchange Commission is the regulat-ing body of the U.S. securities industry.

specialist A market professional who manages the auction market trading in the specific securities he (or she) has been as-signed. He has the responsibility to provide a fair and or-derly market, brings together demand and supply, and steps in with his own money in order to match imbalances in the market.

spread Difference between the asking price at which shares of a certain security are offered and the bid price which some-one is willing to pay for shares of this security.

Supplementary Liquidity Electronic, high-volume members who are incented to add Providers liquidity on the NYSE.

Total Consolidated Tape The Total Consolidated Tape aggregates shares matched at U.S. exchanges and volume of transactions effected otherwise than on an exchange which are reported to the Financial Industry Regulatory Authority.

trade-through rule The trade-through rule helps price protection by demand-ing that an order is not traded through inferior markets, but should instead be directed to the market which offers the best price.

Appendix 259

Appendix B: Simulation Runs and Sensitivity Analyses of the NYSE Model

Insensitive reaction in response to changes in stakeholder power.

changed parameter base run value parameter range ref. power of floor firms 100 10 – 500

sens power50% 75% 95% 100%"NYSE Fraction of E-Trade"

1

0.75

0.5

0.25

01970 1980 1990 2000 2010 2020 2030

Datesens power50% 75% 95% 100%total pressure for more floor trade from floor

60

45

30

15

01970 1980 1990 2000 2010 2020 2030

Date

260 Appendix

Insensitive reaction to changes in the cohesiveness of floor firms

changed parameter base run value parameter range degree of cohesiveness of floor firms 0.7 0.1 – 5

sens cohesiveness50% 75% 95% 100%"NYSE Fraction of E-Trade"

1

0.75

0.5

0.25

01970 1980 1990 2000 2010 2020 2030

Datesens cohesiveness50% 75% 95% 100%total pressure for more floor trade from floor

80

60

40

20

01970 1980 1990 2000 2010 2020 2030

Date

Appendix 261

Simulation run representing an exchange with a small market share

changed parameters base run value parameter value ini market share . 0.8747 0.03 grasso effect strength 1 0

Fraction of E-Trade1

0.75

0.5

0.25

0 2 2 2 2 2 2 2

22 2 2

1 1 1 1 1 1 1

1

1 1 1 1

1970 1980 1990 2000 2010 2020 2030Date

Dm

nl

"NYSE Fraction of E-Trade" : small exchange 1 1 1 1 1"NYSE Fraction of E-Trade" : base run 2 2 2 2 2 2

262 Appendix

Pressure by non-institutional customers

changed parameter base run value parameter range ref. pressure per non-inst customer 1 0.01 – 5

sens non-inst pressure50% 75% 95% 100%"NYSE Fraction of E-Trade"

1

0.75

0.5

0.25

01970 1980 1990 2000 2010 2020 2030

Datesens non-inst pressure50% 75% 95% 100%total pressure for more floor trade from customers

20

15

10

5

01970 1980 1990 2000 2010 2020 2030

Date

Appendix 263

Sensitivity for differences in inertia

changed parameters base run value parameter range ref. fract. institutionalization . 0.3 0.2 – 0.35 ini inertia 0.95 0.05 – 0.95

sens inertia50% 75% 95% 100%"NYSE Fraction of E-Trade"

1

0.75

0.5

0.25

01970 1980 1990 2000 2010 2020 2030

Datesens inertia50% 75% 95% 100%Inertia

1

0.75

0.5

0.25

01970 1980 1990 2000 2010 2020 2030

Date

264 Appendix

Appendix C: Simulation Runs and Sensitivity Analyses of the Generic Model

Comparative sensitivity analyses with quick environmental change: Inertia

changed parameters base run value parameter range ref. fract. change in strategy per pressure p.a. 0.02 0.06 ref. fract. change in attention p.a. 0.05 0.3 ref. fract. inertia decrease 0.15 0.15 – 0.2 ref. fract. institutionalization 0.3 0.2 – 0.3 ini inertia 0.9 0.5 ini attention to stakeholders favoring B 0.1 0.3

generic sens inertia flex50% 75% 95% 100%Orientation to Strategy B

1

0.75

0.5

0.25

00 5 10 15 20 25 30 35 40 45 50

Time (Year)generic sens inertia flex quick50% 75% 95% 100%Orientation to Strategy B

1

0.75

0.5

0.25

00 5 10 15 20 25 30 35 40 45 50

Time (Year)

Appendix 265

Comparative sensitivity analyses with quick environmental change: Attention

changed parameters base run value parameter range ref. fract. change in strategy per pressure p.a. 0.02 0.06 ref. fract. change in attention p.a. 0.05 0.05 – 0.5 ref. fract. inertia decrease 0.15 0.28 ini inertia 0.9 0.2 ini attention to stakeholders favoring B 0.1 0.3

generic sens attention flex50% 75% 95% 100%Orientation to Strategy B

1

0.75

0.5

0.25

00 5 10 15 20 25 30 35 40 45 50

Time (Year)generic sens attention flex quick50% 75% 95% 100%Orientation to Strategy B

1

0.75

0.5

0.25

00 5 10 15 20 25 30 35 40 45 50

Time (Year)

266 Appendix

Appendix D: NYSE Model Equations

ACCESS TO INFORMATION TECHNOLOGY = WITH LOOKUP( Time , ([(1970,0)-(2030,1)],(1970,0),(1975,0), (1980,0.09),(1985,0.18),(1990,0.57),(1995,0.9),(1997,0.97),(1999,1), (2030,1) ) )

Units: Dmnl State of technology that is necessary for electronic trading.

ALGORITHMS PER GAP PER YEAR =

50 Units: algorithms/(Year*Dmnl) "change in cust. orient." = ( pcvd pressure from customers * "effect of cust. orient. on change" - pcvd pressure from the floor * "effect of floor orient. on change" ) * "fract. change in cust. orient. per pressure p.a." Units: Dmnl/Year "change in fraction of e-trade" =

( "pcvd pressure for more e-trade" * "effect of e-trade on change" - pcvd pressure for more floor trade * effect of floor trade on change ) * "fract. change per pcvd pressure p.a."

Units: Dmnl/Year change in fraction of institutional customers =

( indicated fraction of institutional customers - Fraction of Institutional Customers ) / TIME TO BECOME CUSTOMER

Units: Dmnl/Year

Access to Information Technology1

0.5

01970 1980 1990 2000 2010 2020 2030

Time (Year)acce

ss to

info

rmat

ion

tech

nolo

gy

Appendix 267

change in power of floor firms = ( indicated power of floor firms - Power of Floor Firms ) / TIME TO CHANGE POWER OF FLOOR FIRMS

Units: entity/Year change in valuation =

Valuation of Floor Culture by Floor * fractional change in valuation of floor culture

Units: valuation unit/Year commission per share =

"REF. COMMISSION PER SHARE" * "effect of inst. customers on commission"

Units: $/share Part of the floor’s earnings. confidence effect of market share =

WITH LOOKUP( pcvd adequacy of market share , ([(0,0)-(1.2,1)],(0,0),(0.2,0.04),(0.4,0.14),(0.5,0.22),(0.6,0.33), (0.7,0.5), (0.8,0.75),(0.9,0.95),(0.95,0.985),(1,1),(1.2,1) ) )

Units: Dmnl Effect by which performance inadequacies increase the management team's openness to change. Minor inadequacies have less than propor-tional effect, but the effect on openness quickly rises before it slowly approaches the limit of a fully open organization in the case of organiza-tional collapse.

cultural multiplier of pressure from floor =

"rel. valuation of floor culture" * DEGREE OF COHESIVENESS OF FLOOR FIRMS

Units: Dmnl Effect of culture and cohesiveness.

Confidence Effect of Market Share1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

pcvd adequacy of market share

conf

iden

ce e

ffect

268 Appendix

Customer Orientation = INTEG( "change in cust. orient." , INI CUSTOMER ORIENTATION )

Units: Dmnl Attention to and orientation towards institutional and non-institutional customers.

DEGREE OF COHESIVENESS OF FLOOR FIRMS =

0.7 Units: Dmnl

Degree to which floor firms need to rely on each other. Cooperative groups may react with resistance.

degree of trading professionalization =

WITH LOOKUP( Fraction of Institutional Customers , ([(0,0)-(1,1)],(0,0.1),(0.1,0.27),(0.2,0.45),(0.3,0.63),(0.4,0.8), (0.5,0.92),(0.6,0.98), (0.7,0.995),(0.8,1),(0.9,1),(1,1) ) )

Units: Dmnl Portfolio management, information patterns-based trading, hedging, etc.

DESD ADEQUACY OF MARKET QUALITY =

1 Units: Dmnl desired earnings per share =

SMOOTH ( proportional floor earnings per share traded , TIME TO ADJUST DESIRED EARNINGS )

Units: $/share The floor's floating goal of earnings.

"desired market quality from sp. part. by customers" =

SMOOTH3 ( "market quality from sp. participation" , TIME TO CHANGE DESD MARKET QUALITY )

Units: Dmnl Floating goal of desired market quality.

Degree of Trading Professionalization1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

Fraction of Institutional Customers

prof

essi

onal

izat

ion

Appendix 269

desired market share = SMOOTH ( NYSE Market Share , TIME TO ADJUST DESD MARKET SHARE )

Units: Dmnl Floating goal of desired market share.

desired specialist participation =

SMOOTH ( specialist participation , TIME TO ADJUST DESIRED PARTICIPATION )

Units: Dmnl The floor's floating goal of desired specialist participation.

development of liquidity algorithms =

SMOOTH3 ( market quality adequacy gap * ALGORITHMS PER GAP PER YEAR , TIME TO DEVELOP ALGORITHMS )

Units: algorithms/Year Algorithms take about one and a half years to be initiated since a quality gap needs to be perceived as being problematic; this is why there is a third order smooth in the development decision instead of a develop-ment delay.

"dissatisf. with time per inst. customer" =

WITH LOOKUP( relative time to execution , ([(0,0)-(10,1)],(0.9,0),(1,0), (9,1) ) )

Units: dissatisfaction unit/entity Institutional customers' extent of dissatisfaction with or dislike of the NYSE's relative speed of execution.

Dissatisfaction with Time per Institutional Customer1

0.75

0.5

0.25

01 2 3 4 5 6 7 8 9

relative time to execution

diss

atis

fact

ion

270 Appendix

dissatisfaction effect of market quality on pressure = WITH LOOKUP( pcvd adequacy of market quality by customer , ([(0.9,0)-(1.05,1)],(0.9,1),(0.91,0.98),(0.92,0.95),(0.93,0.9),(0.94,0.75), (0.95,0.5),(0.96,0.25),(0.97,0.1),(0.98,0.05),(0.99,0.02),(1,0),(1.05,0) ) )

Units: Dmnl Inversely s-shaped. Slowly approaches maximum, and slowly starts in the beginning because minor inadequacies cause less than proportional reactions.

effect of captial distribution on customers =

WITH LOOKUP( FRACTION OF EQUITIES HELD BY INSTITUTIONS , ([(0,0)-(1,1)],(0,0),(0.1,0.19),(0.2,0.36),(0.3,0.52),(0.4,0.62),(0.5,0.71), (0.6,0.79),(0.7,0.86),(0.8,0.91),(0.9,0.96),(1,1) ) )

Units: Dmnl Institutions participate in trading in a more than proportional way

concave function.

Dissatisfaction Effect of Market Quality on Pressure1

0.75

0.5

0.25

00.900 0.920 0.940 0.960 0.980 1

pcvd adequacy of market quality by customer

diss

atis

fact

ion

effe

ct

Effect of Capital Distribution on Customers1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

FRACTION OF EQUITIES HELD BY INSTITUTIONS

effe

ct

Appendix 271

effect of change on inertia =

WITH LOOKUP( ABS ( "change in fraction of e-trade" ) , ([(0,0)-(0.5,7)],(0,1),(0.05,1.4),(0.1,2.4),(0.15,4.2),(0.2,5.4),(0.3,6.2), (0.5,6.5) ) )

Units: Dmnl Small changes have an underproportional effect on consistency loss. This allows an organization to change very slowly without disruption in its internal consistency. The consistency decrease from change repre-sents turnover rates which became higher, but it also captures changes in the people's thinking even if they remain in the organization

"effect of cust. orient. on change" =

WITH LOOKUP( Customer Orientation , ([(0,0)-(1,1)],(0,1),(0.25,1),(0.5,0.95),(0.8,0.75),(0.9,0.5),(0.96,0.04), (0.98,0.005),(1,0) ) )

Units: Dmnl Limit to the willingness to further react to pressure.

Effect of Change on Inertia8

6

4

2

00 0.100 0.200 0.300 0.400 0.500

"change in fraction of e-trade"

effe

ct

Effect of Customer Orientation on Change1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

Customer Orientation

effe

ct

272 Appendix

"effect of e-trade on change" = WITH LOOKUP( "NYSE Fraction of E-Trade" , ([(0,0)-(1,1)],(0,1),(0.5,1),(0.75,0.95),(0.9,0.75),(0.95,0.5),(0.99,0.01), (1,0) ) )

Units: Dmnl Limit to the willingness to further react to pressure.

effect of employability on resistance =

WITH LOOKUP( pcvd adequacy of employability , ([(0,0)-(1.2,1)],(0,1),(0.5,1),(0.55,0.97),(0.6,0.88),(0.75,0.5),(0.9,0.13), (0.95,0.05),(1,0),(1.2,0) ) )

Units: Dmnl Inversely s-shaped. Slowly approaches maximum, when adequacy is only 0.5 and slowly starts in the beginning because minor inadequacies cause less than proportional reactions.

"effect of floor orient. on change" =

WITH LOOKUP( Floor Orientation , ([(0,0)-(1,1)],(0,1),(0.25,1),(0.5,0.95),(0.8,0.75),(0.9,0.5),(0.96,0.04), (0.98,0.005),(1,0) ) )

Units: Dmnl Limit to the willingness to further react to pressure. The graph has the same shape as the one indicating the effect of customer orientation on change.

Effect of E-Trade on Change1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

"NYSE Fraction of E-Trade"

effe

ct

Effect of Employability on Resistance1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

pcvd adequacy of employability

effe

ct

Appendix 273

effect of floor trade on change = WITH LOOKUP( NYSE Fraction of Floor Trade , ([(0,0)-(1,1)],(0,1),(0.5,1),(0.75,0.95),(0.9,0.75),(0.95,0.5),(0.99,0.01), (1,0) ) )

Units: Dmnl Limit to the willingness to further react to pressure. The graph has the same shape as the one indicating the effect of e-trade on change.

"effect of floor trade on sp. participation" =

WITH LOOKUP( NYSE Fraction of Floor Trade , ([(0,0)-(1,1)],(0,0.1),(1,1) ) )

Units: Dmnl It is the special feature of the Hybrid Market that even when all trades are electronic, there is some specialist participation. In general, the ef-fect of floor trade on specialist participation is assumed to grow linearly.

EFFECT OF GRASSO SCANDAL =

1 + PULSE ( 2004, GRASSO SCANDAL DURATION ) * GRASSO EFFECT STRENGTH

Units: Dmnl In January 2004 a scandal around the former CEO Richard Grasso trig-gered a change of the CEO that decreased inertia.

Effect of Floor Trade on Specialist Participation1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

NYSE Fraction of Floor Trade

effe

ct

274 Appendix

"effect of inst. customers on commission" = WITH LOOKUP( number of institutional customers , ([(10,0)-(100,1)],(10,1),(20,0.95),(65,0.06),(75,0.02),(100,0) ) )

Units: Dmnl Institutional customers became so powerful that they were able to strongly reduce the amount of money they need to pay for the floor's services.

"effect of inst. customers on spread" =

WITH LOOKUP( number of institutional customers , ([(10,0)-(100,1)],(10,1),(25,0.95),(44,0.82),(55,0.6),(65,0.33),(80,0.15), (100,0.05) ) )

Units: Dmnl Regulatory effects that came with the rise of institutional customers such as the transition of quoting in eights of a dollar to sixteenth to pen-nies.

Effect of Institutional Customers on Commission1

0.75

0.5

0.25

00 10 20 30 40 50 60 70 80 90 100

number of institutional customers

effe

ct

Effect of Institutional Customers on Spread1

0.75

0.5

0.25

00 10 20 30 40 50 60 70 80 90 100

number of institutional customers

effe

ct

Appendix 275

effect of institutional customers on power = WITH LOOKUP( Fraction of Institutional Customers , ([(0,0)-(1,1)],(0,1),(0.2,0.98),(0.4,0.93),(0.6,0.75),(0.8,0.5),(1,0.1) ) )

Units: Dmnl Institutional customers diminish the floor's power since they are power-ful as well. Some fraction of institutions has a low effect, but the strength of the effect rises

effect of liquidity algorithms on participation =

( Liquidity Algorithms + "REF. LIQUIDITY ALGORITHMS" ) / "REF. LIQUIDITY ALGORITHMS"

Units: Dmnl Liquidity Algorithms allow the floor to participate also in electronic trades and thus increase specialist participation. Due to the balancing nature of the Liquidity Algorithms Loop, specialist participation remains in reasonable bounds, although it may oscillate slightly around the goal value.

effect of market quality on culture =

WITH LOOKUP( pcvd adequacy of market quality by customer , ([(0.9,-1)-(1.1,1)],(0.93,-0.7),(1,0),(1.07,0.7) ) )

Units: Dmnl Floor participants reduce their valuation of their own culture and way of doing things if they do not provide adequate market quality.

Effect of Institutional Customers on Power1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

Fraction of Institutional Customers

effe

ct

Effect of Market Quality on Culture0.8

0.4

0

-0.4

-0.80.930 0.950 0.970 0.990 1.010 1.030 1.050 1.070

pcvd adequacy of market quality by customer

effe

ct

276 Appendix

effect of market quality on power = WITH LOOKUP( "market quality from sp. participation" , ([(1,0)-(1.1,1)],(1,0),(1.1,1) ) )

Units: Dmnl The higher market quality is, i.e. the higher the floor's contribution is, the more powerful is the floor.

effect of openness on change =

WITH LOOKUP( openness to change , ([(0,0)-(1,1)],(0,0.1),(0.1,0.11),(0.2,0.14),(0.3,0.21),(0.4,0.3),(0.5,0.435), (0.6,0.63),(0.7,0.81),(0.8,0.92),(0.9,0.97),(1,1) ) )

Units: Dmnl Low openness to change may reduce fractional change to 10 percent of its reference value. The effect of openness on change is an s-shaped curve indicating that the NYSE quickly reacts to perceived pressure if it has a rather high openness. It becomes less responsive as openness decreases until its reactivity reaches a lower bound.

Effect of market Quality on Power1

0.75

0.5

0.25

01 1.020 1.040 1.060 1.080 1.100

"market quality from sp. participation"

effe

ct

Effect of Openness on Change1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

openness to change

effe

ct

Appendix 277

effect of profitability on culture = WITH LOOKUP( pcvd adequacy of profitability , ([(0,-0.5)-(2,0.5)],(0,-0.5),(1,0),(2,0.5) ) )

Units: Dmnl Floor participants reduce their valuation of their own culture and way of doing things if they are not profitable.

effect of profitability on resistance =

WITH LOOKUP( pcvd adequacy of profitability , ([(0,0)-(1.1,1)],(0,1),(0.5,1),(0.55,0.97),(0.6,0.88),(0.75,0.5),(0.9,0.13), (0.95,0.05),(1,0),(1.1,0) ) )

Units: Dmnl Inversely s-shaped. Slowly approaches maximum, when adequacy is only 0.5 and slowly starts in the beginning because minor inadequacies cause less than proportional reactions.

EFFECT OF REGULATION =

STEP ( 1, 2005.5) Units: Dmnl

Regulation NMS changed the situation in the market. It came into effect in the year 2005.

Effect of Profitabiltiy on Culture0

-0.125

-0.25

-0.375

-0.50 0.20 0.40 0.60 0.80 1

pcvd adequacy of profitability

effe

ct

Effect of Profitability on Resistance1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

pcvd adequacy of profitability

effe

ct

278 Appendix

effect of relative trading volume on market's spread = WITH LOOKUP( trading volume of the remaining market / TOTAL U.S. SHARE VOLUME IN NYSE- LISTED ISSUES , ([(0,0.8)-(1,1.2)],(0,1.1),(0.5,1),(1,0.9) ) )

Units: Dmnl The market with the higher trading volume usually has more quoted depth which reduces the spread.

effect of relative trading volume on NYSE spread =

WITH LOOKUP( NYSE trading volume / TOTAL U.S. SHARE VOLUME IN NYSE- LISTED ISSUES, ([(0,0.8)-(1,1.2)],(0,1.1),(0.5,1),(1,0.9) ) )

Units: Dmnl The graph has the same shape as the one indicating the effect of rela-tive trading volume on market’s spread.

Effect of Relative Trading Volume on Market's Spread1.1

1.05

1

0.95

0.90 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

"relative trading volume of the remaining market ( = trading volume / TOTAL )

effe

ct

Appendix 279

"effect of sp. participation on market quality" = WITH LOOKUP( specialist participation , ([(0,1)-(0.1,1.1)],(0,1),(0.01,1.015),(0.02,1.03),(0.04,1.055),(0.06,1.075), (0.08,1.09),(0.1,1.1) ) )

Units: Dmnl The curve is concave due to the diminishing marginal utility of specialist participation. This non-linear relationship bases on the fact that there is an absolute limit to the effect that specialist participation can have on market quality. This value always depends on the specific security, but on average it can be assumed that specialist involvement is needed in no more than 10 percent of trades. Then, specialists are able to in-crease market quality by 10 percent.

effect of time to execution on market share =

WITH LOOKUP( relative time to execution , ([(0,0.5)-(9,1.136)],(0,1.1),(0.3,1.04),(0.5,1.02),(0.75,1.005),(1,1), (1.5,0.995), (2,0.99),(3,0.985),(4,0.965),(5,0.91),(6,0.82),(7,0.73), (9,0.5) ) )

Units: Dmnl Upward or downward adjustment of market share based on the NYSE's relative speed.

FINAL TIME =

2030 Units: Year

Effect of Specialist Participation on Market Quality1.1

1.075

1.05

1.025

10 0.020 0.040 0.060 0.080 0.100

specialist participation

effe

ct

Effect of Time to Execution on Market Share1.2

1

0.8

0.6

0.40 1 2 3 4 5 6 7 8 9

relative time to execution

effe

ct

280 Appendix

floor earnings per share handled = commission per share + NYSE spread / HALF SPREADS

Units: $/share The floor makes money from commissions and the half-spread, i.e. the difference between the price and the mid-point between the bid and ask quote.

Floor Orientation =

INTEG( - "change in cust. orient." , 1- INI CUSTOMER ORIENTATION ) Units: Dmnl The NYSE’s attention to and orientation towards floor firms. "fract. change in cust. orient. per pressure p.a." =

"REF. FRACT. CHANGE IN CUST. ORIENT. P.A." * effect of openness on change

Units: Dmnl/(Year*pressure unit) Flexibility of attention. Mix of the NYSE management team's general flexibility of attention and situational factors.

"fract. change per pcvd pressure p.a." =

"REF. FRACT. CHANGE IN TRADING PER PRESSURE P.A." * effect of openness on change

Units: Dmnl/(Year*pressure unit) Responsiveness of the NYSE’s strategy. Mix of the management team's general responsiveness to pressure and situational factors.

"fract. of e-trade among foreign competitors" =

SMOOTH3 ( "Fraction of largest foreign competitors allowing some e-trade" , "TIME TO FULLY IMPLEMENT E-TRADE" )

Units: Dmnl FRACTION OF CAPITAL HELD BY INSTITUTIONS FROM NYSE DATA =

WITH LOOKUP (Time, ([(1950,0)-(2010,1)],(1950,0.072),(1970,0.282),(1990,0.414), (1992,0.417),(1993,0.411),(1995,0.437),(1997,0.477),(1999,0.432), (2000,0.47),(2001,0.483) ) )

Units: Dmnl Data has been taken from NYSE Facts and Figures. There is not data for 1960, so the table goes back to the year 1950. It serves as a com-parison to data from ICI.org which is used as model input.

Appendix 281

"fraction of e-trade in remaining market" = SMOOTH3 ( degree of trading professionalization * ACCESS TO INFORMATION TECHNOLOGY , "TIME TO DEVELOP E-TRADE POSSIBILITIES" )

Units: Dmnl Adoption of e-trade in the market. FRACTION OF EQUITIES HELD BY INSTITUTIONS =

WITH LOOKUP( Time , ([(1970,0)-(2030,1)], (1970,0.185154),(1971,0.20556),(1972,0.201695), (1973,0.224875),(1974,0.258656),(1975,0.263879),(1976,0.247148), (1977,0.267071),(1978,0.290532),(1979,0.282315),(1980,0.274132), (1981,0.2911),(1982,0.324992),(1983,0.354418),(1984,0.376369), (1985,0.398256),(1986,0.374692),(1987,0.390658),(1988,0.359247), (1989,0.364516),(1990,0.375896),(1991,0.370787),(1992,0.372372), (1993,0.400006),(1994,0.422731),(1995,0.420065),(1996,0.433062), (1997,0.424297),(1998,0.433194),(1999,0.419878),(2000,0.450718), (2001,0.480608),(2002,0.508861),(2003,0.523507),(2004,0.548993), (2005,0.572488),(2006,0.587098),(2007,0.615491),(2015,0.666667), (2030,0.714912) ) )

Units: Dmnl Fraction of equities held by institutions such as mutual funds, insurance companies, etc. (see ICI.org).

Fraction of Institutional Customers =

INTEG( change in fraction of institutional customers , 0.25) Units: Dmnl

This is a number that relates to the percentage of shares traded by insti-tutional customers at the NYSE. It ranged around 25 percent in 1970.

Fraction of Equities Held by Institutions0.8

0.4

01970 1980 1990 2000 2010 2020 2030

Date

Dm

nl

282 Appendix

"Fraction of largest foreign competitors allowing some e-trade" = WITH LOOKUP( Time , ([(1970,0)-(2030,1)],(1970,0),(1976,0),(1977,0.0454545), (1982,0.0909091),(1986,0.181818),(1987,0.227273),(1988,0.363636), (1989,0.5),(1991,0.681818),(1994,0.772727),(1996,0.909091), (1997,0.954545),(2000,1),(2030,1) ) )

Units: Dmnl See the graph on page 88. fraction of time at NBBO =

WITH LOOKUP( relative spread of NYSE , ([(0.82,0)-(1.22,1)],(0.82,0.99),(1.22,0.01) ) )

Units: Dmnl This variable expresses the effect of the spread on the trade execution time. A relative spread of 1.02 equally distributes the shares at the NBBO between the NYSE and remaining market. This little shift of the graph to the right represents the fact that the NYSE is more consolidat-ed since it is a single stock exchange whereas the remaining market consists of several exchanges.

fractional change in valuation of floor culture =

( effect of profitability on culture + effect of market quality on culture ) * "REF. FRACTIONAL CHANGE OF VALUATION PER YEAR"

Units: Dmnl/Year GRASSO EFFECT STRENGTH =

1 Units: Dmnl

Expresses by what factor the Grasso scandal increased the ref. fract. inertia decrease.

Fraction of Time at NBBO1

0.75

0.5

0.25

00.750 0.850 0.950 1.050 1.150 1.250

relative spread of NYSE

fract

ion

Appendix 283

GRASSO SCANDAL DURATION = 0.5

Units: Year Duration of uncertainty and turbulence from scandal. HALF SPREAD = 2 Units: Dmnl Number of half spreads contained in the spread. indicated fraction of institutional customers =

effect of capital distribution on customers Units: Dmnl indicated NYSE market share =

( "NYSE market share from NBBO (cons.)" * ( 1- EFFECT OF REGULATION ) + "NYSE market share from NBBO (fragm.)" * EFFECT OF REGULATION ) * market share adjustment

Units: Dmnl Market share from NBBO, moderated by adjustments from speed and market qualtiy.

indicated power of floor firms =

effect of market quality on power * effect of institutional customers on power * "REF. POWER OF FLOOR FIRMS"

Units: entity Inertia =

INTEG( institutionalization - inertia decrease , INI INERTIA ) Units: consistency unit Inward-orientation of thinking, cognitive inertia, … inertia decrease =

Inertia * "REF. FRACT. INERTIA DECREASE" * EFFECT OF GRASSO SCANDAL * effect of change on inertia

Units: consistency unit/Year Management team turnover, unlearning, …

284 Appendix

INI CUSTOMER ORIENTATION = 0.1

Units: Dmnl The initial customer orientation represents the minimum amount of at-tention that the NYSE management attributes to its customers.

INI MARKET SHARE =

0.8747 Units: Dmnl INI INERTIA =

0.9 Units: consistency unit Initial value = effect of (ref. fract. consistency decrease / ref. fract. institutionalization) = 0.9 INITIAL TIME =

1970 Units: Year institutionalization =

"REF. FRACT. INSTITUTIONALIZATION" * Inertia * limiting effect on institutionalization

Units: consistency unit/Year Growth of inertia, e.g. by cultural institutionalization, learning, etc. limiting effect on institutionalization =

WITH LOOKUP( Inertia , ([(0,0)-(1,1)],(0,1),(0.2,1),(0.4,0.99),(0.6,0.9),(0.75,0.75),(0.9,0.5), (0.97,0.25),(1,0) ) )

Units: Dmnl This effect counteracts the reinforcing institutionalization loop. The more the organization is consistent, the more it slows consistency growth down.

Limiting Effect on Institutionalization1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

Inertia

limiti

ng e

ffect

Appendix 285

Liquidity Algorithms = INTEG( development of liquidity algorithms , 0)

Units: algorithms Liquidity Algorithms allow the floor to participate also in electronic trades. This mathematical formulation chosen allows Liduidity Algo-rithms to rise and to decline. Even in extreme situations, their value stays in reasonable bounds. Therefore, a fuzzy min and max formula-tion is not chosen here.

market quality adequacy gap =

DESD ADEQUACY OF MARKET QUALITY - pcvd adequacy of market quality by customer

Units: Dmnl Difference between desired and actual adequacy. "market quality from sp. participation" =

"effect of sp. participation on market quality" * "REF. MARKET QUALITY"

Units: Dmnl Quality attribute of NYSE floor trading. This is what stock exchanges used to compete on. In particular it includes price quality, but also vola-tility, quoted depth (volume) at each liquidity point, etc. Market quality may also adjust market share upwards.

market share adjustment =

"wt. on time vs. spread among all customers" * effect of time to execution on market share + ( 1- "wt. on time vs. spread among all customers" ) * "market quality from sp. participation"

Units: Dmnl Upwards or downwards adjustment of market share, independent of the part of market share which is set by the time at the NBBO.

"no of non-institutional customers" =

"TOTAL NO. OF CUSTOMERS" * ( 1- Fraction of Institutional Customers )

Units: entity Normalized number of private or retail customers.

number of institutional customers =

Fraction of Institutional Customers * "TOTAL NO. OF CUSTOMERS" Units: entity

Normalized number of institutional customers.

286 Appendix

"NYSE Fraction of E-Trade" = INTEG( "change in fraction of e-trade" , 0)

Units: Dmnl Fraction of fully automated trading at the NYSE. NYSE Fraction of Floor Trade =

INTEG( - "change in fraction of e-trade" , 1) Units: Dmnl

Fraction to which trades are executed manually on the floor. NYSE Market Share =

SMOOTH3I ( indicated NYSE market share , TIME FOR CHANGING MARKET SHARE , INI MARKET SHARE )

Units: Dmnl The NYSE’s fraction of total U.S. consolidated share volume in NYSE-listed issues.

"NYSE market share from NBBO (cons.)" =

WITH LOOKUP( fraction of time at NBBO , ([(0,0)-(1,0.8)],(0.01,0.01),(0.07,0.05),(0.25,0.27),(0.5,0.54),(0.75,0.77), (0.78,0.79),(0.99,0.8) ) )

Units: Dmnl The better the relative spread, the higher the fraction of time at the NBBO, i. e. the fraction of time the NYSE displays the national best bid and offer. The line rises below proportionally in the very beginning so as to account for the fact that an exchange that displays bad prices most of the time has difficulties to attract a sufficient depth of liquidity at the best price. A critical mass of liquidity is necessary for an exchange to attract volume.

NYSE Market Share from NBBO (cons.)1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

fraction of time at NBBO

mar

ket s

hare

from

NB

BO

Appendix 287

"NYSE market share from NBBO (fragm.)" = WITH LOOKUP( fraction of time at NBBO , ([(0,0)-(1.22,0.6)],(0.01,0.01),(0.07,0.05),(0.123,0.115),(0.2,0.19), (0.35,0.28), (0.65,0.43),(0.8,0.49),(0.99,0.52) ) )

Units: Dmnl Both NBBO calculations follow a highly similar graphical shape, except that for the fragmented market, it levels off on a lower level. Due to fragmentation of orders, one exchange is not able to dominate the mar-ket to the extent at which this was possible before.

NYSE spread =

"REF. SPREAD" * effect of relative trading volume on NYSE spread * "effect of inst. customers on spread"

Units: $/share The spread is the difference between the bid and the asking price.

NYSE time to execution =

"NYSE Fraction of E-Trade" * "TIME TO EXECUTION E-TRADE" + NYSE Fraction of Floor Trade * TIME TO EXECUTION FLOOR TRADE

Units: second/trade The time it takes to execute a trade, i.e. the time between order sub-mission and execution.

NYSE trading volume =

NYSE Market Share * TOTAL U.S. SHARE VOLUME IN NYSE- LISTED ISSUES

Units: share/Year The trading volume can be used to measure the model’s fit to data.

NYSE Market Share from NBBO (fragm.)0.6

0.45

0.3

0.15

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

fraction of time at NBBO

mar

ket s

hare

from

NB

BO

288 Appendix

openness to change = 1 - Inertia * confidence effect of market share * "REF. OPENNESS PER INERTIA"

Units: Dmnl Readiness to change that is limited by inertia, but may be inhanced in the case of a performance threat.

pcvd adequacy of employability =

specialist participation / desired specialist participation Units: Dmnl pcvd adequacy of market quality by customer =

"market quality from sp. participation" / "Desired Market Quality From Sp. Part. by Customers"

Units: Dmnl pcvd adequacy of market share =

NYSE Market Share / desired market share Units: Dmnl pcvd adequacy of profitability =

proportional floor earnings per share traded / desired earnings per share

Units: Dmnl "pcvd pressure for more e-trade" =

"total pressure for more e-trade from customers" * Customer Orientation Units: pressure unit

The management team's biased perception of institutional pressure for more e-trade.

pcvd pressure for more floor trade =

total pressure for more floor trade from customers * Customer Orientation + total pressure for more floor trade from floor * ( 1 - Customer Orientation )

Units: pressure unit The management team's biased perception of pressure for more floor trade.

Appendix 289

pcvd pressure from customers = ( "total pressure for more e-trade from customers" + total pressure for more floor trade from customers ) * Customer Orientation

Units: pressure unit Biased perception of pressure from institutional and non-institutional customers.

pcvd pressure from the floor =

total pressure for more floor trade from floor * Floor Orientation Units: pressure unit Biased perception of pressure from floor. Power of Floor Firms =

INTEG( change in power of floor firms , "REF. POWER OF FLOOR FIRMS" )

Units: entity The degree of influence of the floor.

"pressure for more e-trade per inst. customer" =

"dissatisf. with time per inst. customer" * "REF. PRESSURE PER DISSATISF. UNIT"

Units: pressure unit/entity Pressure or desire for quicker and more electronic trading per institu-tional customer.

pressure for more floor trade per customer =

dissatisfaction effect of market quality on pressure * "REF. PRESSURE PER NON.INST. CUSTOMER"

Units: pressure unit/entity Resistance and dissatisfaction pressure per stakeholder due to dissatis-faction with the extent of market quality offered by the NYSE.

proportional floor earnings per share traded =

floor earnings per share handled * specialist participation Units: $/share

Floor earnings per share, adjusted by the extent of specialist participa-tion in trading. It gives a better measure of total earnings.

"REF. COMMISSION PER SHARE" =

1 Units: $/share Traditional, fix commission per share.

290 Appendix

"REF. FRACT. CHANGE IN CUST. ORIENT. P.A." = 0.03

Units: Dmnl/(Year*pressure unit) The management team's general flexibility of attention. It may represent the degree to which the organization 'looks outside' and seeks infor-mation on important stakeholders.

"REF. FRACT. CHANGE IN TRADING PER PRESSURE P.A." =

0.02 Units: Dmnl/(Year*pressure unit)

The NYSE's general propensity to react to perceived pressure. It may also represent the degree of decentralization or employee empower-ment.

"REF. FRACT. INERTIA DECREASE" =

0.15 Units: Dmnl/Year

Due to the statement of a NYSE employee that people were grown from within, I assume that only half of them came from ousite the organiza-tion. Thus the assumed external turnover rate is half of that of the fi-nance and insurance industry (30.0 % / 2 = 15.0 %).

"REF. FRACT. INSTITUTIONALIZATION" =

0.3 Units: Dmnl/Year

Institutionalization grows by a fraction of 0.3 of current inertia per year. Since ref. institutionalization is higher than ref. consistency decrease, the organization becomes inert over the years.

"REF. FRACTIONAL CHANGE OF VALUATION PER YEAR" =

0.12 Units: Dmnl/Year

This variable allows floor culture to diminish only slowly with an average delay of about 8 years.

"REF. LIQUIDITY ALGORITHMS" =

1 Units: algorithms "REF. MARKET QUALITY" =

1 Units: Dmnl

Appendix 291

"REF. OPENNESS PER INERTIA" = 1

Units: Dmnl/consistency unit Openness per difference to maximum possible inertia of 1.

"REF. POWER OF FLOOR FIRMS" =

100 Units: entity

The reference power of floor firms equals the total power of custom-ers—allowing for two theoretically equally powerful groups. Their power balance shifts endogenously over time.

"REF. PRESSURE PER DISSATISF. UNIT" =

1 Units: pressure unit/dissatisfaction unit

Pressure or customer desire for quicker trading and more electronic trading per institutional customer.

"REF. PRESSURE PER NON.INST. CUSTOMER" =

0.5 Units: pressure unit/entity

Pressure from dissatisfaction per non-institutional customer is half the pressure of institutional customers since non-institutional customers are less powerful.

"REF. RESISTANCE PRESSURE PER FLOOR FIRM" =

1 Units: pressure unit/entity "REF. SP PARTICIPATION" =

0.1 Units: Dmnl Maximum of 10 percent. "REF. SPREAD" =

0.22 Units: $/share It relates to the traditional value of the year 1970. "REF. VALUATION OF FLOOR CULTURE" =

1 Units: valuation unit Maximum.

292 Appendix

"rel. valuation of floor culture" = Valuation of Floor Culture by Floor / "REF. VALUATION OF FLOOR CULTURE"

Units: Dmnl relative spread of NYSE =

NYSE spread / spread in market Units: Dmnl Determines the average time the NYSE quotes at the NBBO. relative time to execution =

NYSE time to execution / time to execution in market Units: Dmnl

Attribute that has become highly important for the order routing deci-sion. It expresses the relation between the NYSE's and the market`s speed.

resistance pressure for floor system per floor firm =

effect of employability on resistance * effect of profitability on resistance * "REF. RESISTANCE PRESSURE PER FLOOR FIRM"

Units: pressure unit/entity Resistance per floor firm due to dissatisfaction with the extent to which it is able to participate in trading.

SAVEPER =

0.25 Units: Year [0,?] The frequency with which output is stored. specialist participation =

"effect of floor trade on sp. participation" * effect of liquidity algorithms on participation * "REF. SP PARTICIPATION"

Units: Dmnl Fraction of trades executed against money or shares of a specialist. spread in market =

"REF. SPREAD" * effect of relative trading volume on market's spread * "effect of inst. customers on spread"

Units: $/share Difference between the bid and the asking price at exchanges other than the NYSE.

Appendix 293

TIME FOR CHANGING MARKET SHARE = 1

Units: Year Short reaction time of one year since market share represents liquidity and routing decision and thus adjusts quickly.

TIME STEP =

0.0078125 Units: Year [0,?] The time step between iterations of calculations. TIME TO ADJUST DESD MARKET SHARE =

3 Units: Year Medium adjustment time of 3 years for performance measures. TIME TO ADJUST DESIRED EARNINGS =

5 Units: Year

Since earnings deteriorate, the floor gets used to a worse situation ra-ther slowly which explains the relatively long adjustment time of 5 years.

TIME TO ADJUST DESIRED PARTICIPATION =

5 Units: Year

Since participation deteriorates, the floor gets used to a worse situation rather slowly which explains the relatively long adjustment time of 5 years.

TIME TO BECOME CUSTOMER =

5 Units: Year

There is a time delay to the indicated fraction so as to neglect short-time changes and to account for the delay between the creation and the amendment a portfolio of securities.

TIME TO CHANGE DESD MARKET QUALITY =

10 Units: Year

The adjustment time is long (10 years) because market quality mainly falls and people only slowly get used to a worse situation.

294 Appendix

TIME TO CHANGE POWER OF FLOOR FIRMS = 2

Units: Year Adjustment time of 2 years means a rather quick, but not instantaneous adaptation.

TIME TO DEVELOP ALGORITHMS =

1.5 Units: Year

Algorithms take about one and a half years to be initiated since the gap needs to be perceived as being problematic.

"TIME TO DEVELOP E-TRADE POSSIBILITIES" =

5 Units: Year

Delay time between the technical development and implementation of e-trade. The delay of 5 years can be divided into the market's reaction and implementation time.

"TIME TO EXECUTION E-TRADE" =

1 Units: second/trade

Electronic trading is considered fast trading, and a trade is considered fast if it has sub-second speed. Therefore the time it takes to execute a trade in an electronic environment is set to 1 second. The concept of the time to execution is similar to the notion of latency. Advantages of technology are not be taken into consideration here and a constant time to executon of 1 second in electronic trading is assumed.

TIME TO EXECUTION FLOOR TRADE =

9 Units: second/trade

The least amount of time it takes to execute a trade manually. Accord-ing to the NYSE, this is 9 seconds.

time to execution in market =

"fraction of e-trade in remaining market" * "TIME TO EXECUTION E-TRADE" + ( 1- "fraction of e-trade in remaining market" ) * TIME TO EXECUTION FLOOR TRADE

Units: second/trade Speed of trading in the market.

Appendix 295

"TIME TO FULLY IMPLEMENT E-TRADE" = 5

Units: Year Equivalent to the time to develop e-trade possibilities for real data.

"TOTAL NO. OF CUSTOMERS" =

100 Units: entity

Normalized number of customers. "total pressure for more e-trade from customers" =

"pressure for more e-trade per inst. customer" * number of institutional customers

Units: pressure unit Pressure by the entire group of institutional customers.

total pressure for more floor trade =

total pressure for more floor trade from customers + total pressure for more floor trade from floor

Units: pressure unit Pressure for more floor trade from non-institutional customers and the floor.

total pressure for more floor trade from customers =

pressure for more floor trade per customer * "no of non-institutional customers"

Units: pressure unit Total pressure by the entire group of non-institutional customers for more floor trade.

total pressure for more floor trade from floor =

cultural multiplier of pressure from floor * resistance pressure for floor system per floor firm * Power of Floor Firms

Units: pressure unit Total pressure by the entire floor for more floor trade.

296 Appendix

TOTAL U.S. SHARE VOLUME IN NYSE- LISTED ISSUES = WITH LOOKUP( Time , ([(1970,0)-(2030,4e+012)], (1970,3.5e+009),(1980,1.4e+010), (1990,4.8e+010),(1995,1.1e+011),(2000,3.2e+011),(2005,5.2e+011), (2007,8.5e+011),(2008,1.2e+012),(2009,1.5e+012),(2011,2e+012), (2015,2.5614e+012),(2020,2.98246e+012),(2030,3.57895e+012) ) )

Units: share/Year Data is taken from NYSE Facts and Figures: Historical > Annual report-ed volume, turnover rate, reported trades (mils. of shares), and Market Activity > Consolidated Volume in NYSE Listed Issues. Data after 2009 is assumed.

trading volume of the remaining market =

( 1 - NYSE Market Share ) * TOTAL U.S. SHARE VOLUME IN NYSE- LISTED ISSUES

Units: share/Year The trading volume can be used to measure the model’s fit to data.

Valuation of Floor Culture by Floor =

INTEG( change in valuation , 1) Units: valuation unit

The higher the market quality the floor is able to provide, the higher it values its own contribution and culture. The more profitable the floor is, the more it values its own way of doing things. In 1970, it is still at al-most 100 percent.

"wt. on time vs. spread among all customers" =

ACCESS TO INFORMATION TECHNOLOGY * Fraction of Institutional Customers

Units: Dmnl Importance of time among customers.

Total U.S. Share Volume in NYSE-listed Issues4e+012

3e+012

2e+012

1e+012

01970 1980 1990 2000 2010 2020 2030

Date

shar

e/Y

ear

Appendix 297

Appendix E: Generic Model Equations

Attention to Stakeholders Favoring A = INTEG ( - change in attention, 1 - INI ATTENTION TO STAKEHOLDER FAVORING B)

Units: Dmnl Orientation towards the stakeholders favoring the ‘old’ strategy A.

Attention to Stakeholders Favoring B =

INTEG ( change in attention, INI ATTENTION TO STAKEHOLDER FAVORING B)

Units: Dmnl Orientation towards the stakeholders favoring the ‘new’ strategy B.

change in attention = ( ABS ( pcvd pressure from stakeholders favoring B

* effect of attention to B on change ) - pcvd pressure from stakeholders favoring A * effect of attention to A on change ) * "fract. change in attention per pressure p.a."

Units: Dmnl/Year change in performance = ( indicated performance – Performance )

/ TIME FOR CHANGING PERFORMANCE Units: performance unit/Year

change in strategy = ( pcvd pressure from stakeholders favoring B * effect of B on change

- pcvd pressure from stakeholders favoring A * effect of A on change ) * "fract. change per pcvd pressure p.a."

Units: Dmnl/Year

298 Appendix

confidence effect of performance = WITH LOOKUP ( pcvd adequacy of performance, ([(0,0)-(1.2,1)],(0,0),(0.2,0.04),(0.4,0.14),(0.5,0.22),(0.6,0.33),(0.7,0.5), (0.8,0.75),(0.9,0.95),(0.95,0.985),(1,1),(1.2,1) ) )

Units: Dmnl Effect by which performance inadequacies increase the management team's openness to change. Minor inadequacies have less than propor-tional effect, but the effect on openness quickly rises before it slowly approaches the limit of a fully open organization in the case of organiza-tional collapse.

desired performance = SMOOTH ( Performance, TIME TO ADJUST DESD PERFORMANCE )

Units: performance unit Floating performance goal.

desired quality A by stakeholders favoring A = SMOOTH ( quality A, TIME TO ADJUST DESIRED QUALTIY)

Units: quality unit Floating goal of desired quality A.

desired quality B = diffusion of B in remaining market

* "REF.QUALITY B OF STRATEGY B" + ( 1 - diffusion of B in remaining market ) * "REF. QUALITY B OF STRATEGY A"

Units: quality unit Expectation by customers/stakeholders.

Confidence Effect of Performance1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

pcvd adequacy of performance

conf

iden

ce e

ffect

Appendix 299

DEVELOPMENT OF STRATEGY B = WITH LOOKUP ( Time, ([(0,0)-(50,1)],(0,0),(5,0),(10,0.18),(15,0.57),(20,0.9),(22,0.97),(24,1), (50,1) ) )

Units: Dmnl Invention of strategy B.

DEVELOPMENT OF STRATEGY B QUICK =

WITH LOOKUP ( Time, ([(0,0)-(50,1)],(0,0),(7,0),(12,1),(50,1) ) )

Units: Dmnl Quicker invention of strategy B, or different reference group.

diffusion of B in remaining market = SMOOTH3 (DEVELOPMENT OF STRATEGY B *

( 1 - SWITCH QUICK DEVELOPMENT ) + SWITCH QUICK DEVELOPMENT * DEVELOPMENT OF STRATEGY B QUICK, TIME TO DIFFUSE B IN REMAINING MARKET )

Units: Dmnl Adoption of strategy B in market.

Development of Strategy B1

0.75

0.5

0.25

00 5 10 15 20 25 30 35 40 45 50

Time (Year)

Dm

nl

Development of Strategy B Quick1

0.75

0.5

0.25

00 5 10 15 20 25 30 35 40 45 50

Time (Year)

Dm

nl

300 Appendix

effect of A on change = WITH LOOKUP ( Orientation to Strategy A, ([(0,0)-(1,1)],(0,1),(0.5,1),(0.75,0.95),(0.9,0.75),(0.95,0.5),(0.99,0.01), (1,0) ) )

Units: Dmnl Limit to the willingness to further react to pressure.

effect of attention to A on change =

WITH LOOKUP ( Attention to Stakeholders Favoring A, ([(0,0)-(1,1)],(0,1),(0.25,1),(0.5,0.95),(0.8,0.75),(0.9,0.5),(0.96,0.04), (0.98,0.005), (1,0) ) )

Units: Dmnl Limit to the willingness to further react to pressure.

effect of attention to B on change =

WITH LOOKUP ( Attention to Stakeholders Favoring B, ([(0,0)-(1,1)],(0,1),(0.25,1),(0.5,0.95),(0.8,0.75),(0.9,0.5),(0.96,0.04), (0.98,0.005),(1,0) ) )

Units: Dmnl Limit to the willingness to further react to pressure. The graph has the same shape as the one indicating the effect of attention to A on change.

Effect of A on Change1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

Orientation to Strategy A

effe

ct

Effect of Attention to A on change1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

Attention to Stakeholders Favoring A

effe

ct

Appendix 301

effect of B on change = WITH LOOKUP ( Orientation to Strategy B, ([(0,0)-(1,1)],(0,1),(0.5,1),(0.75,0.95),(0.9,0.75),(0.95,0.5),(0.99,0.01), (1,0) ) )

Units: Dmnl Limit to the willingness to further react to pressure. The graph has the same shape as the one indicating the effect of A on change.

effect of change on inertia =

WITH LOOKUP ( ABS ( change in strategy ), ([(0,0)-(0.5,7)],(0,1),(0.05,1.4),(0.1,2.4),(0.15,4.2),(0.2,5.4),(0.3,6.2), (0.5,6.5) ) )

Units: Dmnl Small changes have a less than proportional effect on consistency loss. This allows an organization to change incrementally without disruption in its internal consistency. The consistency decrease from change rep-resents turnover rates, but it also captures changes in the people's thinking even if they remain in the organization.

Effect of Change on Inertia8

6

4

2

00 0.100 0.200 0.300 0.400 0.500

change in strategy

effe

ct

302 Appendix

effect of openness on change = WITH LOOKUP ( openness to change, ([(0,0)-(1,1)],(0,0.05),(0.1,0.06),(0.2,0.1),(0.3,0.18),(0.4,0.3),(0.5,0.435), (0.6,0.63), (0.7,0.81),(0.8,0.92),(0.9,0.97),(1,1) ) )

Units: Dmnl Low openness to change may reduce fractional change to 10 percent of its reference value. The effect of openness on change is an s-shaped curve indicating that the organization quickly reacts to perceived pres-sure if it has a rather high openness. It becomes less responsive as openness decreases until its reactivity reaches a lower bound.

effect of quality A on performance =

WITH LOOKUP ( quality A, ([(0,1)-(1,1.1)],(0,1),(1,1.1) ) )

Units: Dmnl Effect that pushes performance upward proportionally to the extent to which the organization outperforms in quality A.

Effect of Openness on Change1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

openness to change

effe

ct

Effect of Quality A on Performance1.1

1.075

1.05

1.025

10 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

quality A

effe

ct

Appendix 303

effect of quality A on resistance = WITH LOOKUP ( pcvd adequacy of quality A, ([(0,0)-(1.1,1)],(0,1),(0.1,0.99),(0.15,0.97),(0.2,0.93),(0.5,0.5),(0.8,0.07), (0.85,0.03),(0.9,0.01),(1,0),(1.1,0) ) )

Units: Dmnl Inversely s-shaped. Slowly approaches maximum, and slowly starts in the beginning because minor inadequacies cause less than proportional reactions.

"effect of rel. quality B on performance" =

WITH LOOKUP ( "rel. quality B", ([(-0.9,0)-(1,2)],(-0.9,0),(-0.7,0.53),(-0.6,0.7),(-0.5,0.85),(-0.4,0.93),

(-0.3,0.97),(-0.2,0.99),(0,1),(0.25,1.005),(0.5,1.07),(0.7,1.2),(1,1.4) ) ) Units: Dmnl

Effect that may push performance upward or downward depending on the organization's achievement regarding quality B relative to the mar-ket. It is formulated as an order winning criterion.

FINAL TIME = 50

Units: Year Time bounds of the simulation.

Effect of Quality A on Resistance1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

pcvd adequacy of quality A

effe

ct

Effect of Relative Quality B on Performance2

1.5

1

0.5

0-1 -0.60 -0.20 0.20 0.60 1

"rel. quality B"

effe

ct

304 Appendix

"fract. change in attention per pressure p.a." = "REF. FRACT. CHANGE IN ATTENTION P.A."

* effect of openness on change Units: Dmnl/(pressure unit*Year)

Flexibility of attention. Mix of the management team's general flexibility of attention and situational factors.

"fract. change per pcvd pressure p.a." = "REF. FRACT. CHANGE IN STRATEGY PER PRESSURE P.A."

* effect of openness on change Units: Dmnl/pressure unit/Year

Responsiveness of the strategy to pressure. Mix of the management team's general responsiveness to pressure and situational factors.

fraction of stakeholders favoring B = diffusion of B in remaining market

Units: Dmnl It is assumed that the market is adapted to the demands of market par-ticipants.

indicated performance = "REF. PERFORMANCE" * performance adjustment

Units: performance unit Inertia =

INTEG ( institutionalization-inertia decrease, INI INERTIA ) Units: consistency unit Inward-orientation of thinking, cognitive inertia, …

inertia decrease = Inertia * "REF. FRACT. INERTIA DECREASE"

* effect of change on inertia Units: consistency unit/Year Management team turnover, unlearning, …

INI ATTENTION TO STAKEHOLDER FAVORING B = 0.1

Units: Dmnl The initial attention represents the minimum amount of attention that the management team attributes to its stakeholders.

Appendix 305

INI INERTIA = 0.9

Units: consistency unit Initial value = effect of (ref. fract. consistency decrease /

ref. fract. institutionalization) = 0.9 INITIAL TIME =

0 Units: Year Initial time bounds of the simulation.

institutionalization = "REF. FRACT. INSTITUTIONALIZATION" * Inertia

* limiting effect on institutionalization Units: consistency unit/Year

Growth of inertia, e.g. by cultural institutionalization, learning, etc. limiting effect on institutionalization =

WITH LOOKUP ( Inertia, ([(0,0)-(1,1)],(0,1),(0.2,1),(0.4,0.99),(0.6,0.9),(0.75,0.75),(0.9,0.5), (0.97,0.25),(1,0) ) )

Units: Dmnl This effect counteracts the reinforcing institutionalization loop. The more the organization is consistent, the more the effect slows consistency growth down.

no of stakeholders favoring A = "TOTAL NO. OF STAKEHOLDERS"

- number of stakeholders favoring B Units: entity Normalized number of stakeholders.

Limiting Effect on Institutionalization1

0.75

0.5

0.25

00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1

Inertia

limiti

ng e

ffect

306 Appendix

number of stakeholders favoring B = fraction of stakeholders favoring B

* "TOTAL NO. OF STAKEHOLDERS" Units: entity

Normalized number of stakeholders. openness to change = 1 - Inertia * confidence effect of performance

* "REF. OPENNESS PER INERTIA" Units: Dmnl

Readiness to change that is limited by inertia, but may be inhanced in the case of a performance threat.

Orientation to Strategy A =

INTEG ( - change in strategy, 1 ) Units: Dmnl

Fraction to which the focal organization's strategy is oriented to the ‘old’ strategy A.

Orientation to Strategy B =

INTEG ( change in strategy, 0 ) Units: Dmnl

Fraction to which the focal organization's strategy is oriented to the ‘new’ strategy B.

pcvd adequacy of performance = Performance / desired performance

Units: Dmnl pcvd adequacy of quality A = quality A / desired quality A by stakeholders favoring A

Units: Dmnl

Appendix 307

pcvd inadequacy of strategy per stakeholder B = WITH LOOKUP ( "rel. quality B",

([(-1,0)-(1,1)],(-1,1),(0,0),(1,0) ) ) Units: Dmnl

Stakeholders' extent of dissatisfaction with or dislike of the focal organi-zation's strategy/offerings.

pcvd pressure from stakeholders favoring A = total stakeholder pressure for more A

* Attention to Stakeholders Favoring A Units: pressure unit

The management team's biased perception of stakeholder pressure for A.

pcvd pressure from stakeholders favoring B = total stakeholder pressure for more B

* Attention to Stakeholders Favoring B Units: pressure unit

The management team's biased perception of stakeholder pressure for B.

Performance =

INTEG ( change in performance, "REF. PERFORMANCE" * effect of quality A on performance)

Units: performance unit May represent market share, sales volume, size of customer base, etc.

performance adjustment = "wt. on quality B vs. quality A"

* "effect of rel. quality B on performance" + ( 1 - "wt. on quality B vs. quality A" ) * effect of quality A on performance

Units: Dmnl Upward or downward adjustment of performance by quality A and B.

Perceived Inadequacy of Strategy per Stakeholder B1

0.75

0.5

0.25

0-1 -0.60 -0.20 0.20 0.60 1

"rel. quality B"

pcvd

inad

equa

cy

308 Appendix

PERMANENTLY POWERFUL STAKEHOLDERS FAVORING A = 0

Units: entity A group that can significantly impede an organization’s operations such as change-averse employees.

quality A = Orientation to Strategy A * "REF. QUALITY A OF STRATEGY A"

Units: quality unit Quality of the 'old' strategy, such as price quality in trading, resolution quality in photography. This is what organizations in the respective area used to compete on.

quality B = Orientation to Strategy B * "REF.QUALITY B OF STRATEGY B"

+ Orientation to Strategy A * "REF. QUALITY B OF STRATEGY A" Units: quality unit

Achievement in the ‘new’ quality by focal organization. "REF. FRACT. CHANGE IN ATTENTION P.A." = 0.05

Units: Dmnl/pressure unit/Year The management team's general flexibility of attention. It represents the degree to which the organization 'looks outside' and seeks information on important stakeholders.

"REF. FRACT. CHANGE IN STRATEGY PER PRESSURE P.A." = 0.02

Units: Dmnl/pressure unit/Year An organization's general propensity to react to perceived pressure. It may represent the degree of decentralization or employee empower-ment.

"REF. FRACT. INERTIA DECREASE" = 0.15

Units: Dmnl/Year Reference inertia decrease has been adapted to a rather low rate of annual turnover in order to represent an organization that accumulates inertia rather quickly.

Appendix 309

"REF. FRACT. INSTITUTIONALIZATION" = 0.3

Units: Dmnl/Year Institutionalization grows by a fraction of 0.3 of current inertia per year. Since ref. institutionalization is higher than ref. consistency decrease, the organization becomes inert over the years.

"REF. OPENNESS PER INERTIA" = 1

Units: Dmnl/consistency unit Openness per difference to maximum possible inertia of 1.

"REF. PERFORMANCE" = 0.5

Units: performance unit "REF. PRESSURE PER STAKEHOLDER FAVORING B" = 0.6

Units: pressure unit/entity Medium extent of pressure or desire of new stakeholder for strategy B.

"REF. QUALITY A OF STRATEGY A" = 1

Units: quality unit Attribute of the new strategy. High value of quality A.

"REF. QUALITY B OF STRATEGY A" = 0.1

Units: quality unit Degree to which strategy A can fulfill quality B. Strategy A has a low value of quality B.

"REF. RESISTANCE PRESSURE PER STAKEHOLDER FAVORING A" = 1

Units: pressure unit/entity High extent of resistance pressure of old stakeholder for old strategy.

"REF.QUALITY B OF STRATEGY B" = 1

Units: quality unit An attribute of the new strategy B. E.g. speed as the attribute of elec-tronic trading, ability to store photos electronically, high ethical compli-ance, etc.

310 Appendix

"rel. quality B" = quality B - desired quality B

Units: quality unit The relative quality B espresses the difference between the focal organ-ization's quality B and what is desired by customers/stakeholders.

SAVEPER =

0.25 Units: Year [0,?] The frequency with which simulation output is stored.

stakeholder pressure for more B = pcvd inadequacy of strategy per stakeholder B

* "REF. PRESSURE PER STAKEHOLDER FAVORING B" Units: pressure unit/entity

Pressure or customer desire for more strategy B per stakeholder favor-ing B.

stakeholder resistance pressure for more A =

"REF. RESISTANCE PRESSURE PER STAKEHOLDER FAVOR-ING A" * effect of quality A on resistance

Units: pressure unit/entity Resistance per stakeholder due to dissatisfaction with the extent of quality A offered.

SWITCH QUICK DEVELOPMENT = 0

Units: Dmnl Can switch on and off a different environment.

TIME FOR CHANGING PERFORMANCE = 1

Units: Year Reaction time of stakeholders.

TIME STEP =

0.0078125 Units: Year [0,?]

The time step between iterations of calculations.

Appendix 311

TIME TO ADJUST DESD PERFORMANCE = 3

Units: Year Medium delay time.

TIME TO ADJUST DESIRED QUALTIY = 5

Units: Year Long delay/adjustment time to changes in desired attributes.

TIME TO DIFFUSE B IN REMAINING MARKET = 5

Units: Year Time delay between the invention and implementation of the new strat-egy in the market.

"TOTAL NO. OF STAKEHOLDERS" = 100

Units: entity Normalized number of stakeholders.

total stakeholder pressure for more A = stakeholder resistance pressure for more A

* ( no of stakeholders favoring A + PERMANENTLY POWERFUL STAKEHOLDERS FAVORING A )

Units: pressure unit Total pressure by the entire group of stakeholders favoring A for more A.

total stakeholder pressure for more B = stakeholder pressure for more B * number of stakeholders favoring B

Units: pressure unit Total pressure by the entire group of stakeholders favoring B for more B.

"wt. on quality B vs. quality A" = fraction of stakeholders favoring B

Units: Dmnl Importance of strategy B and quality B among stakeholders.