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July 5, 2006

Broker Group Wants NYSE Hybrid Put on Hold

By Gregory Bresiger

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  • Broker Group Wants NYSE Hybrid Put on Hold

The recently approved New York Stock Exchange hybrid market plan has been challenged in a federal appeals court in Washington, D.C.

The Independent Broker Action Committee (IBAC), a group of unreconstructed NYSE floor brokers, filed a lawsuit against the Securities and Exchange Commission in the United States Court of Appeals. In it, they contend the SEC violated the rights of "the investing public and the independent floor brokers," Marc Powers, an IBAC attorney, told Traders Magazine.

The litigation asks the court to "vacate" the SEC order approving the hybrid plan. It also wants to set aside parts of the merger agreement between the New York Stock Exchange and Archipelago Holdings. Here the litigation questions the NYSE method of allocating trading privileges through annual trading licenses.

Several observers in the trading industry have questioned if the IBAC actually wants to de-rail the entire hybrid plan, parts of which have already gone into effect. However, IBAC officials have insisted that the litigation, which seeks no cash damages, is serious because it is attempting to ensure the new market is legitimate. And one outspoken opponent of the hybrid plan, George Rutherfurd, said the floor brokers' litigation raises "reasonable issues" from their perspective.

"The floor brokers," Rutherfurd an exchange consultant wrote in response to a question from Traders Magazine, "were beaten up pretty badly in the hybrid approval process."

Neither the SEC nor the NYSE had an immediate comment on the lawsuit. However, NYSE, in its filing with the court, warned that a delayed hybrid plan, would "render worthless" years of work, hurt its competitive position and "jeopardize" its efforts to comply with Reg NMS. The latter, which had an original implementation date of June 29th for the trade through rule, is now slated to become effective next year. That delay could also affect the hybrid plan implementation, a broker source told Traders Magazine.

The IBAC, in a petition for review, produced a litany of what it claimed were unfair advantages granted to specialists through the approval of hybrid. The broker group seeks to delay Phase II of the plan. This much-debated phase includes the activation of the specialist algorithm.

The IBAC lawsuit said this part of the plan violated the specialist's negative obligation as stipulated in exchange rules. This obligation forbids a specialist from engaging in proprietary trading in situations in which trading is not necessary to maintain a fair and orderly market.

"The Hybrid Market Order," according to the IBAC petition, "allows specialists to compete against public orders, and vests specialists with significant advantages that will virtually assure their ability to prevail over public orders on an ongoing basis, in contravention of their negative obligation."

The IBAC's lawsuit also quoted from new exchange interpretations of Rules 104, which covers specialist dealings, and Rule 108, which specifies members' bids and offers. These new interpretations were contained in the later amendments to the hybrid plan.