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February 1, 2000

Perspectives: The Decline And Fall of the NYSE Empire? Some See the Last Days of the Specialist

By John A. Byrne

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  • Perspectives: The Decline And Fall of the NYSE Empire? Some See the Last Days of the Specialist

The long-term survival of the New York Stock Exchange is in doubt as the evolving equities markets force it to accommodate change.

Name calling hurts, but it doesn't break bones. The intrinsic value of the NYSE's services count.

At the heart of the Big Board's intricate trade execution services are the specialists, whose liquidity role is often unappreciated. The worst cuts are charges that the specialists are a sort of protected cartel, or trade union for generations of Irish and Italian (as well as other ethnic groups).

Whatever the truth, the months ahead will test the influence of the specialists as never before.

Immediacy on Orders

The most important economic function the specialist provides is immediacy. That requires the specialist to commit capital and take the other side on a block trade. The level of immediacy provided by specialists still gives them an edge over the encroaching alternative trading systems. How long that would last under the current form of competition is unclear. But Junius Peake, finance professor at the University of Northern Colorado, has some idea.

"We are in the declining and waning days of the specialist system," Peake said.

"You will have people in the future who provide immediacy in stocks of their choice," he added. "But I don't think you will have people called specialists."

For their part, specialists, who number 480 pros, are making adjustments as the exchange plans for the brave new world. The exchange is acting like a turbo-charged rocket, taking off with a dizzying number of initiatives aimed at diminishing the encroaching competition.

Under the arrangements, the specialist would concede some ground in the hope of retaining the Big Board's 85 percent share of listed trade volume. One concession is an Internet-based electronic order book allowing member-controlled direct execution for orders of 1,000 shares or less. Another plan would establish a virtual display of the floor, allowing customers of members to follow the executions of their orders. Still another plan, Institutional Xpress, would give institutions more direct electronic access to the floor.

If the changes sound as high-tech as the audacious ATSs, there is a good reason. ATSs will soon play in the same field as the Big Board and have more liberal access to the Intermarket Trading System connecting the Big Board with the regional marts and Nasdaq. Some ATSs are even planning to become stock exchanges. That would give these ATSs an opportunity to become the primary exchanges for public companies.

This is the brave new world conceived by Arthur Levitt's Securities and Exchange Commission. This is the brave new world in which the lowest-cost providers get a new advantage. Can the NYSE specialist thrive in this environment? Does Wall Street need them?

Institutional Pressure

"There are three or four large [sell-side] firms that would say no," said Robert Fagenson, president of NYSE specialist firm Fagenson & Co. "They want to take the role of the specialist away. They look at our trading profits and say, why should we give [our trades] to the specialist. "These firms would like to create a highly-concentrated market of four to six players that control listed trades off the floor."