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November 29, 2005

NYSE Hybrid Proposal Strikes Compromises; Approval Likely, But Not All Are Happy

By Gregory Bresiger

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  • NYSE Hybrid Proposal Strikes Compromises; Approval Likely, But Not All Are Happy

Passage of the New York Stock Exchange's much amended market plan now appears likely. The Big Board filed a "non-substantive" seventh amendment to the plan last month. That plan mainly supports those exchange rules affected by the sweeping proposal intended to increase electronic trading at the mostly open outcry bourse. The amendment included no further changes, leading observers to conclude the battle to reshape the exchange was over.

In an interview with Traders Magazine, Bob McSweeney, Senior Vice President of the New York Stock Exchange's Competitive Position Group, stated that the final plan will satisfy traders and predicted that it will be the last one required by regulators.

"We believe that we are balancing incentive for liquidity providers and liquidity takers. This proposal strikes the appropriate balance," McSweeney said.

Critics

Critics of the hybrid are still upset over changes pushed through in the fifth amendment. These changes increase the power of specialists and floor brokers. Still, critics appear resigned to the likelihood of changes in the current form.

"I don't want to keep fighting this. Now let's see what happens," said Michael Buek, a senior equity trader and a principal with the Vanguard Group of Funds, which sent a critical comment letter to the SEC after the filing of the fifth amendment.

Buek complains the finished plan "still discourages us from placing limit orders. We post a displayed order and someone can still step in front of our order."

Another trading executive criticized the plan, but predicted that it would be approved. "The hybrid plan meets the letter of the regulatory law in this Reg NMS environment," he said, "but it retains the unique advantages of the specialist through an algorithm." This official has followed the hybrid amendments from one to seven.

McSweeney acknowledged disagreement. But he argued that the finished hybrid plan is a compromise.

"The amendments are responsive to feedback from our advisory committees. They are designed to enhance displayed size at the best bid and offer and to aggregate liquidity for efficient and low-cost price discovery," McSweeney said.

Privately, NYSE supporters agreed that the Big Board's historic chokehold on listed business will be riding on this plan.

Right Choice?

The wrong Big Board model could result in an exodus of customers. That's because stronger linkages and electronic standards mandated by Reg NMS will mean regional exchanges and other market centers will be in a better position to take away NYSE business, trading observers say. Indeed, NYSE clients are looking at alternatives.

"We understand that the NYSE plan can't satisfy everyone," Vanguard's Buek commented. But he also said Vanguard would wait and see how the hybrid market works. However, Buek explained that "90 percent of our orders are placed electronically and, if we can't be treated fairly, then we will go to a place where electronic orders are treated fairly."