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July 27, 2005

Bang Raps the NYSE's Hybrid Plan

By Gregory Bresiger

(Traders Magazine, July 2005) -- The Big Board's pending hybrid plan and its proposed merger with Archipelago will be a "boon for seat holders" but will conflict with the regulatory goals of greater transparency and fairness, a top ECN official recently charged.

"The hybrid market proposal is designed at least in part to protect and preserve the special time and place advantages the NYSE floor currently enjoys," said Kim Bang, president and chief executive officer of Bloomberg Tradebook. Bang testified recently before the U.S. Senate Banking Committee, which was reviewing the aftermath of Reg NMS.

But Bang said the hybrid plan could destroy the goals of Reg NMS.

Bang had two beefs with NYSE's hybrid proposal. First, a so-called "clean-up" price hurts orders sent from outside the exchange to Direct+ for automatic execution. Second, orders on the book hidden from public view in so-called "agency interest files" would have priority over limit orders posted by traders from outside the NYSE.

Bang charged that the NYSE has proposed a clean up price that unfairly penalizes incoming market and marketable limit orders. The cleanup price is how incoming orders will be filed against orders on the specialist's book, Bang said. Limit orders, Bang added, already on the specialist's book get a better deal than they had bargained for in setting their limit prices at the expense of the incoming public investor's order.

For example, under the NYSE hybrid proposal, those incoming orders sent to Direct+ execute first at the NYSE's best quote, he contended. They then sweep as many orders on the book away from the NYSE's best quote as necessary. But instead of filling at successively inferior prices, the order executes at the last and worst of the lot, the clean-up price, he added. The liquidity taker may pick all the shares he needs, but he will pay more for some of them than their suppliers want. The liquidity suppliers get "price improved" while the liquidity taker receives a lower price, Bang said.

Bang complained that, under the broker agency interest and specialist interest files part of the hybrid plan, floor brokers and specialists will be able to "place hidden orders." This will allow them to jump ahead of client orders, according to Bang.

An NYSE specialist, who didn't want to be quoted by name, said Bloomberg had its own conflicts of interest. "What about the reserve function of Bloomberg's own system?" he asked.

Nevertheless, the NYSE, Bang told lawmakers, is going to have conflicts of interest as its transforms itself into publicly held entity.

"What are the real world implications of an entity that enjoys monopoly powers suddenly being charged with maximizing benefit for shareholders?" Bang asked.

An NYSE spokesman, asked to respond to Bang's comments, told Traders Magazine that, "Under the hybrid plan, undisclosed customer interest in the broker files is executed only after displayed interest at the best bid and offer." He said that is "on parity with the specialist book at the clean-up price on sweeps, just as occurs in the auction today when a broker represents a not-held order in the crowd."

The NYSE spokesman added that, under the hybrid plan, the specialists' role will continue to be subject to unique responsibilities and trading restrictions not applicable to any other market participant.