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September 12, 2006

NYSE Specialist Minimum Display Size Halved

By Gregory Bresiger

The New York Stock Exchange, in a move benefiting specialists, is backpedaling on a provision of its recently approved hybrid market proposal.

A decision to lighten the specialists' burden when using hidden reserve files on the order book is part of a series of recent concessions the New York has granted specialists, changes that reshape how they interact with customer orders.

An NYSE spokesman, in an interview, said the changes "balance our interests in both increasing displayed liquidity at best prices and promoting supplemental liquidity at those prices through algorithmic interaction with auto-ex orders."

An institutional trader, who has been critical of the NYSE hybrid market plan, disagreed. He said the rule changes "make it easier for specialist's hidden dealer orders to compete with public orders. It is another example in which the NYSE public customer is disadvantaged."

Specifically, specialists must display 1,000 shares when using hidden, or non-displayed, orders on the Big Board's electronic book. Under the hybrid plan approved by the Securities and Exchange Commission, the specialist was required to display at least 2,000 shares of dealer interest at the exchange BBO.

The latest rule change is part of a series of recent changes that critics say gives specialists too many privileges at the expense of the public investor. The Big Board also wants to let specialists make certain "destabilizing" trades without the permission of an exchange official. It is also seeking to let specialists trade on parity when building a position. But exchange officials defended these changes as providing more market depth. An NYSE official said they put the specialist on par with floor brokers, providing "more liquidity on our new electronic platform."