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January 31, 2008

NYSE Specialist Sees Light at the End of the Tunnel

By Peter Chapman

LaBranche & Co., experiencing a turnaround in its core New York Stock Exchange cash equities business, announced it would not enter into a strategic transaction with another firm anytime soon.

Last July, the beleaguered NYSE specialist hired mergers-and-acquisitions boutique Freeman & Co. to advise it on a possible transaction. Freeman & Co. handled the sales of all or part of at least five U.S. broker-dealers last year.

Last month, LaBranche said that after "carefully considering all alternatives reasonably available," its board advised the firm to "focus on its current business activities." However, the board will continue to consider "strategic alternatives."

LaBranche's announcement comes against a backdrop of declining volume at the NYSE and the departures of two of the seven NYSE specialist firms. The Big Board's market share, since the advent of increased electronic trading at the exchange, has been cut in half. So have the number of traders on the floor.

Still, LaBranche maintains the business of trading stocks at the NYSE is improving. "Our traditional cash equities business has certainly stabilized," Michael LaBranche, the firm's chief executive, told analysts last October, "and on a quarter-over-quarter basis has shown some improvement. That is due to cost cutting. But it's also due to increased revenues with our algorithms."

LaBranche added that the firm does most of its trading electronically and only uses people for "unusual situations." The firm has just 65 employees on the floor, down from a high of about 300 five or six years ago.

The firm has also spent between $10 million and $12 million to develop algorithms to trade in the NYSE's year-old hybrid manual-electronic marketplace.

Going forward, LaBranche expects its total head count of 275 people to drop even further, while its ability to trade more will increase. As it is, LaBranche is trading considerably fewer shares these days. In the third quarter of 2007, it traded 2.2 billion shares, down from 4 billion in the third quarter of 2006.

It hopes to boost that figure. A new revenue-sharing program instituted by the NYSE encourages specialists to trade more aggressively. "We are adjusting our algorithms so that we can be on the national best bid and offer more often," LaBranche said, "which will allow us to trade more."

The firm, which trades derivatives as well as stocks, grossed $163.6 million from its trading activities during the first nine months of 2007, up slightly from $162.7 million in the same period during 2006.

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