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March 23, 2005

A Level Playing Field Is Promised in Hybrid

By Peter Chapman

The New York Stock Exchange expects its hybrid market to be operational early next year. A senior Big Board official says it would take a year to make the technological changes needed to prepare floor traders for the hybrid market. However, these changes in the Big Board's technology, he stressed, would not give exchange specialists any undue trading advantages.

"It will take us twelve months to provide the functionality to the brokers and specialists to enable them to operate in both [auction and electronic] environments," Bob McSweeney, the executive in charge of competitive position at the exchange, told the annual conference of the Security Traders Association of Chicago.

As part of this transformation, the Big Board is awaiting approval from the Securities and Exchange Commission for proposed changes to its Direct+ auto-ex mechanism. Still, the exchange is "designing the specifications as if we would receive approval," according to McSweeney.

With the changes, specialists would be able to interact electronically with the exchange's limit order book. McSweeney noted, however, that the specialists would only be able to use algorithms to provide liquidity and not to take it. They would also not be able to view the so-called "broker interest files." These are sets of quotes posted by floor brokers. To allay concerns specialists will be able to "steal" a trade at only minimal cost, "it's set up so they must make meaningful price improvement," McSweeney said. If a stock's spread is 20 cents or more, for instance, then the specialist cannot improve upon the price by less than five cents.