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September 28, 2006

Big Board Price Hike Angers Small Brokers

By Editorial Staff

Small- and mid-sized members of the New York Stock Exchange are livid over the Big Board's recent price increases.

Larger firms, such as RBC Capital Markets and Jefferies Execution Services, are joining with smaller independent floor brokers, such as Prime Executions and McKeon Brothers, to vent their anger over the New York's August 1 price hike.

"The amount of the increase is unprecedented," Jefferies' attorney told Big Board execs John Thain and Cathy Kinney in a letter, "and appears inequitable, discriminatory, anticompetitive and inconsistent with the mandates of the Securities Exchange Act of 1934."

Jefferies complained that the new fee structure would result in a 17-fold, or $8.5 million, increase in its annual NYSE trading expenses.

RBC is also on the warpath. The mid-sized firm complained to the Securities and Exchange Commission via its attorney that the new fee structure does not conform to the principles of the 1934 Act. The fee schedule, RBC contends, "adversely impacts smaller firms to the advantage of the larger firms who are already at fee caps."

Under the New York's new fee structure, sources say, only the six largest bulge bracket firms would benefit from the monthly $750,000 cap. They are Goldman Sachs, Morgan Stanley, Merrill Lynch, UBS, Citigroup and Lehman Brothers.

All NYSE member firms are now subject to paying the exchange $0.00025 per share to transact. To be eligible for the cap, a firm must trade at least 135 million shares per day.

The small independent NYSE floor brokers are screaming the loudest, many claiming they may be forced out of business by the increase. Several have sent letters to the SEC, asking it to prevent the Big Board from acting.

"This proposal would raise my firm's fees by an astounding 124.1 percent or $54,400," an irate Jospeh Masseria told the SEC. "This number on a percentage basis is staggering. Never before have I heard of anyone raising prices on such a huge scale."

Jamie Friedman, a floor broker for 15 years, told the regulator his firm's expenses would jump 325 percent, or $75,500 annually. Friedman employs five traders and is worried that he will have to close down. "Do not let the NYSE force me out of business because of an unevenly applied and arbitrary structure," he appealed to the regulator.

Despite broker pleadings, the New York remains unmoved. According to an executive there, the Big Board has no plans to rescind the price change. More pricing changes are on the way, though, the exec noted, although he could not say whether they would be increases or decreases.

Some broker-dealers are already investigating ways to avoid the new fees by routing through bigger firms and order aggregators. They can route those orders that need not be represented on the floor by their own employees through another broker-dealer.

One executive with a bulge bracket firm told Traders Magazine that small- and mid-sized firms were approaching the bulge shops about sending their flow through them.

Investment Technology Group is one mid-sized NYSE member looking at its alternatives. ITG President Ray Killian recently told analysts his firm's NYSE bill would increase by $200,000 per month under the NYSE's new structure.

Killian says his firm is looking at routing through Nasdaq in order to save money, according to Josh Elving, an analyst with Piper Jaffray.

Indeed, Nasdaq execs claim they are already seeing a pick-up in their Brut-to-DOT routing business because of the price changes. Nasdaq charges firms $0.0002 per share to route orders through its Brut broker-dealer unit to the New York's DOT system.

Nasdaq's Brian Hyndman, senior vice president of transaction services, says the Brut service has seen a notable increase in flow since the NYSE announced its pricing changes.

Because many of those shares actually execute on Nasdaq's platform rather than flow through to DOT, Nasdaq's market share in NYSE-listed names has spiked dramatically in the past six weeks, Hyndman says.

In June, Nasdaq matched an average of 8.9 percent of listed volume. In July, after the NYSE price change was announced, matched volume averaged 10.9 percent. On a recent day in August, Nasdaq matched 13.5 percent of all listed shares, Hyndman reported.