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August 9, 2006

Big Board Brokers Get Better Tools for New Order Types

By Peter Chapman

New York Stock Exchange floor brokers are getting new order types and technology that they hope will put them on equal footing with specialists.

Yet while the new tools are exclusive to brokers trading on the Big Board floor, there is pressure being put on the NYSE by upstairs traders to also use them.

The Big Board is amending its rules to permit floor brokers to use discretionary and pegging orders when trading electronically under the New York's evolving hybrid marketplace. It is also augmenting its floor broker handheld technology to accommodate the new tactics.

"This is a positive overall," Joe Cangemi, in charge of BNY Direct Execution, says. "It lets the broker electronically reconstruct the trading strategies of the physical marketplace."

Many floor brokers have been clamoring for the new tools for the past year. At least one group of brokers, the Independent Broker Action Committee (IBAC), has resorted to legal tactics to pressure the NYSE to deliver the tools.

IBAC has publicly complained that recent changes in the Big Board's rules have given more power to specialists, leaving floor brokers at a disadvantage.

The specialists' algorithm is a particular bone of contention. IBAC complains it gives specialists trading abilities that floor brokers lack.

The group believes the new order types-called d-Quotes-will better equip them to compete with specialists.

D-Quotes essentially extend the functionality of the so-called e-Quotes used by floor brokers today. Via their handhelds, brokers post e-Quotes on the exchange's Display Book.

The functionality allows the brokers to trade electronically at a time when more Big Board trading is moving off the floor.

D-Quotes come in two varieties: pegging and discretionary. Pegging allows a floor broker to peg his e-Quote to the best bid or offer. That relieves him of the burden of constantly reacting to moving markets.

Discretionary orders allow the floor broker to post his e-Quotes at one price, but actually trade at a worse price if need be. They allow him the discretion to quickly pay more or receive less in a fast-moving electronic environment.

Among other things, discretionary pricing will permit the floor broker to price improve incoming orders much like specialists with their algorithms.

The d-Quotes are expected to be implemented in late October, sources say, at the same time as the specialists' algorithms are to be available.

The new tools may not be exclusive to floor brokers for long. Usage of d-quotes is restricted to brokers in the crowd under the NYSE's rules, but traders outside 30 Broad St. are screaming for them as well.

Giving them what they want might not be a good move, according to Cangemi. The trader believes that allowing outside traders to use d-Quotes would splinter the pool of information that exists on the floor. That would result in worse fills. "It would decentralize the marketplace," Cangemi frets.