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August 31, 2004

Buyside Traders Take Stock Of NYSE's Sweeping Model

By Peter Chapman

The New York Stock Exchange's plan to open itself up to more automatic executions is drawing mixed reviews.

The Big Board recenly announced it was revamping its Direct+ auto-ex mechanism to make it possible for institutional traders to get immediate fills on large blocks. The move comes as the exchange is under pressure from the Securities and Exchange Commission and the buyside to automate more of its trading.

Buyside traders praise the Big Board for taking steps towards reform, but have reservations about some of the details of the proposal. "There's no doubt it's going to be a better market," said John Wheeler, head of equity trading at fund giant American Century, "but I don't know if [the proposal] goes far enough."

Traders are pleased the New York has eliminated the size and time restrictions of Direct+. Traders approve of the proposal to establish automatic routing between the exchange and competing market centers. Traders are also pleased to see that Direct+ will accept immediate-or-cancel orders.

On the other hand, traders have reservations about at least two components of the plan: the so-called "liquidity replenishment points" and floor brokers' "agency interest files." The first shuts off Direct+ temporarily if a stock moves too far too quickly. The second lets floor brokers post orders invisible to traders off the floor.

As for liquidity replenishment: "We on the buyside want an unencumbered ability to sweep stocks," said Ted Oberhaus, head trader at Lord, Abbett & Co., "not to the nearest nickel as has been proposed."