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August 31, 2004

Will NYSE Plan Settle Market Structure Debate?

By Editorial Staff

Big Board officials, announcing they have filed with the regulators to expand the exchange's Direct+ electronic trading program, say they are creating a new hybrid market. However, some critics complain that the New York Stock Exchange, after these changes, will still be "too slow."

Mike Plunkett, president of Instinet's North American institutional brokerage, says he's still reviewing the rather lengthy NYSE filing. However, he said the Big Board's previous efforts of responding to criticism have not been good.

Institutional Express

"Let's not forget in the past," Plunkett says, "the NYSE has come up with answers and the history has not been good." Plunkett cited the discontinued Institutional Express and the now expanded Direct+. The latter program, which has grown from a relatively insignificant amount of NYSE flow to some 10 percent today, still has "not helped the Fidelities to get trades down effectively," according to Plunkett.

Nevertheless, the NYSE, in its filing, says "the proposed amendments reflect significant changes to the structure of the exchange's markets." And it concedes that it is proposing these changes because of the "requests of some of our customers for greater speed, certainty and anonymity of order execution."

Among the key elements on the NYSE's plan:

*The elimination of order size restrictions for auto-ex orders.

*The elimination of the 30-second limitation for consecutive auto-ex orders in accounts in which the same person is directly or indirectly interested.

*Permitting immediate or cancel orders.

*Permitting market orders to be automatically executed. Marker orders not designated for automatic execution will be executed in the market where they have an opportunity for price improvement.

*Creating a new order type - Auction Limit (AL) orders. AL orders provide the opportunity for price improvement inherent in the auction market.

*All quotes subject to automatic execution, unless designated otherwise.

Although NYSE officials declined requests for interviews, a floor player said the plan should stop much of the criticism of the Big Board. "We are going to be dramatically faster, yet we will retain our auction market principles that serve our investors so well," says David Humphreville, president of the Specialists Association, which represents exchange specialists. He added that the NYSE, as a hybrid, will continue, "to dominate" in order flow. The Big Board now has about 80 percent of the listed business.

Some trading industry players are privately saying that the latest NYSE initiative, if successful, will slow or end efforts for massive market structure reform under consideration at the SEC.

NYSE seat holders are watching nervously as lighter trade volume and narrower spreads hurt business. The price of seats have dropped. At the time of the announced reform plans last month, one seat sold for a reported $1.25 million. That compares with the record set in August, 1999, when a seat changed hands for a reported $2.65 million.