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February 2, 2006

Year of Change

By Michael Scotti

It had almost slipped my mind. It was the day of the historic vote last month that would merge the New York Stock Exchange and Archipelago. A brokerage executive, who also owned a seat, excused himself during our phone conversation, saying he was heading over to the exchange to "vote it out of existence." He was among the 95 percent of the members who voted in favor of the merger.

The NYSE is not going out of existence, despite the gallows humor the executive offered. But the NYSE will be a different place in the next six months or so. Electronic trading is coming. This will be a year of change at the NYSE.

The specialist has been the foundation of the auction process held at the corner of Broad and Wall streets for more than 100 years. The system, however, has displayed cracks in the last decade. Most observers forget that the SEC's Order Handling Rules were also promulgated because specialists often delayed posting incoming bids and offers that tightened spreads. The Order Handling Rules just didn't apply to Nasdaq dealers. Other scandals come to mind, too, including the Oakford mess. That's when 10 floor brokers were nabbed for trading for their own account in the late-90s. Most recently specialists received another black eye. They eventually settled SEC charges of front running with a $240 million settlement.

Still, without the rise of technology and the move to decimal pricing, it would probably be business as usual at the NYSE. The SEC realized this when it passed Reg NMS, which is forcing the NYSE to become more electronic. Indeed, the trading floor will be a vastly different place when the NYSE's answer to Reg NMS is unveiled in June. Executive Editor Peter Chapman's cover story dissects the NYSE's hybrid market proposal, one that allows both floor-based and electronic trading to co-exist in an auction environment. Questions remain in the trading community regarding how hybrid works. Chapman's story should answer many of those questions, as well as discus concerns within the industry.

Traders Magazine has written extensively about hybrid, particularly the controversial amendments five through seven. In an effort to bring more in-depth coverage on this important topic, Traders Magazine will be hosting a web seminar on hybrid. The date is Wednesday, February 22nd. This will be Traders Magazine's first web seminar. We plan to organize more educational forums. There is also a new feature in this issue called "Trading Insights." In this month's story, Brian Fagen, who heads electronic trading at Morgan Stanley, discusses currents within the self-trading area, as well as the marketplace.

Enjoy the issue and best of luck this year!

Michael Scotti,

Editorial Director