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Jared Dillian
Traders Magazine Online News

Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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November 8, 2005

Saving the Auction

By Michael Scotti, Editorial Director

Specialists matter. Floor brokers earn their keep. Human intervention in markets remains a vital service, especially for stocks that are not traded frequently.

That's a frequent argument heard from NYSE officials as they talk up the latest revisions of their hybrid market plan. It is a plan that just was amended for the sixth time.

Specialists matter. Floor brokers earn their keep. Human intervention in markets remains a vital service, especially for stocks that are not traded frequently.

That's a frequent argument heard from NYSE officials as they talk up the latest revisions of their hybrid market plan. It is a plan that just was amended for the sixth time.

Big Board officials were defending these amendments recently because the nation's biggest investment company, the Vanguard Group, recently joined the chorus of hybrid critics.

"The plan puts us at a disadvantage," said Gus Sauter, a managing director with Vanguard, which filed a comment letter with the SEC. Sauter complained to Traders Magazine last month that, "We must place a reserve order through a floor broker. Why can't we just do it ourselves?"

Indeed, here is the nub of the problem. What is the purpose of the specialist in an era of electronic trading? Some Big Board supporters have conceded do-it-yourself investing might be ok if one is trading GM or IBM.

But, NYSE officials, in a letter just filed with the SEC, ask what about someone who must trade the second-tier or third-tier stocks?

"Human judgment," Big Board officials wrote, "is particularly valuable in less-liquid securities, during the opening and the closing of trading and during times of uncertainty, such as when an earnings surprise, news or an outside event leads to market volatility and/or instability..."

The logic of the Big Board is stark: The NYSE is a less dangerous place than its biggest competitor, Nasdaq. That's provided that the NYSE, under its hybrid plan, is able to modernize and maintain its essential auction system.

Big Board officials seem to be suggesting that the inherently volatile structure of electronic markets becomes apparent during times of market crisis. That's when specialists and floor brokers, armed with new electronic tools, including their own algorithms, will maintain orderly markets when electronic exchange proponents are running for the hills.

Hybrid critics believe that this is an exaggeration; that NYSE backers are telling a stretcher in order to save a floor that is doomed by the march of progress. It is a debate that is at the heart of our national market system. For more on it, please read our At Deadline and Washington columns, which are chock full of these compelling debates.

Also, have you noticed how hedge funds have been fueling so much of the flow on trading desks? Hedge funds will continue to be an important profit engine for brokerage firms. I hope you'll take time to read our cover story this month on hedge funds.

Michael Scotti,

Editorial Director