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October 19, 2006

Floor Brokers Look for Lifeboats

By Gregory Bresiger

Also in this article

  • Floor Brokers Look for Lifeboats
  • Page 2

With the New York Stock Exchange in the midst of a transformation to a hybrid manual-electronic marketplace, the spotlight is on the vulnerable independent floor broker. The typically small independent floor brokerage makes its living servicing both the buyside and the sellside from its special vantage point: the specialist's post. But with more trading moving into the electronic sphere, a stake in that piece of real estate will become less valuable. Some independent floor brokers have moved upstairs. Others are mulling the possibility.

Still, moving their trading operations upstairs won't save many struggling NYSE floor broker businesses, some of which have already failed in the last five years.

That's the prediction of various Big Board brokerage execs who detailed the numerous hurdles in changing their long-held business model of open outcry.

"I don't see the efficiency of using a floor broker in an electronic age," said one upstairs trading executive who cut his teeth on the floor. "The floor brokers sold a service-access to capital and being at the point of sale. And now that's gone."

Indeed, the floor had traditionally offered a time and place advantage to the clients of floor brokers. But that has waned as more order flow finds its way to new electronic trading venues. The executive also noted that the ranks of floor brokers have declined over the past five years, along with fewer specialists and house brokers.

Another executive warned that any surviving floor broker must understand that, with multiple new execution venues, "there will be less and less of a need for the non-member sellside NYSE firm to use them." The sellside, in the new electronic market, will be able to control more trades themselves, the executive said.

Roadblocks Ahead

There will be other roadblocks for floor brokers looking upstairs. Most firms, said another trading exec, will fail to make the transition because they won't have the capital to transform themselves upstairs. He estimated that moving a floor brokerage unit upstairs would take between $5 million and $20 million, depending on the firm.

Since these brokers will have lost their competitive advantage of being on the floor, the exec asked, "why will going upstairs make them any different than the brokers who are already there?"

This executive predicted that about half the NYSE floor brokerage firms would be out of business in the next five years. Their numbers have already declined from 287 to 216 over the last five years (See chart).

Craig Rothfeld, executive director of W.J. Bonfanti (WJB), said his floor broker firm made the transition two years ago by becoming an NASD broker-dealer.

"In June 2004, we saw and recognized that to survive and compete, you couldn't only be a floor broker," Rothfeld said.

So WJB applied to the NASD to become a member as it continued its membership in the NYSE. It retains five floor brokers as well as having an upstairs presence of 16 traders and sales traders. WJB also has an 11-person operational staff. But Rothfeld warned that most floor brokers don't have the resources to do the same.

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