Floor Brokerages Remake Themselves

Downstairs upstairs at the NYSE

Traders Magazine, August 2008

Nina Mehta

Brokerage firms that once made their living solely on the floor of the New York Stock Exchange-downstairs-are few and far between these days. The surviving firms that have outlasted the industry's move to electronic trading did so by reinventing themselves. Some moved a good portion of their operations off the floor-to upstairs desks. Others have tried to broaden their trading niche more gradually as they expanded into new services for customers.

"To really succeed in the current trading environment, trading firms that were floor brokers must transcend the New York Stock Exchange," says Craig Rothfeld, executive director at institutional broker WJB Capital Group. "Their business strategy shouldn't be guided by decisions made by the NYSE management about the New York market."

Floor brokers, who once dominated trading at the NYSE, have had their heads handed to them over the last couple of years. In June, they represented 6 percent of the NYSE's volume, down from almost 18 percent in in the first quarter of 2007. Competition from electronic trading tools and regulatory change--a.k.a. Regulation NMS--have decimated the once-thriving NYSE floor.

But what shrank the floor community may have made the remaining brokerages with floor operations more resilient. That, at least, is the argument some expound on the floor. These firms have passed through a long hard winter of consolidation, and many are emerging with leaner operations and a dual upstairs-downstairs focus that could lead to more-versatile futures. At the same time, the NYSE is finally trying to spruce up the ability of floor brokers to execute orders on the floor, where, for the last year, many say they've been disadvantaged compared to upstairs desks.

"As a floor broker, you're nowadays in the same situation as you would be as an upstairs trader," says Samuel Lek, CEO of Lek Securities, a direct-access agency execution firm that clears for professional clients across equities, equity derivatives, futures and fixed income. "Floor brokers have become plain-old sales traders and they have a duty to route to the best market, not just the NYSE." Lek Securities, which has two floor brokers, now sees its NYSE operation as a "plain-vanilla part of the company's business."

To enable floor brokerages to compete more easily with upstairs desks, the NYSE last year relaxed its grip on them. In June 2007, the exchange lifted a rule that prohibited floor brokerages from trading NYSE-listed products in other market centers. Brokers and clerks, now called sales traders, can reach all trading venues and trade all NMS securities from their booths, once they get the necessary regulatory approvals. As a result, some floor brokers are now accessing dark pools, trading Nasdaq and American Stock Exchange-listed products, and sending pieces of orders algorithmically into the market as they work big orders for customers.

Point of Sale

Daniel Tandy, senior managing director at institutional broker Prime Executions and an executive floor governor at the NYSE, admits that floor brokers used to reside at the top of the totem pole. "The exchange was where the liquidity was, and we had a point-of-sale advantage," he says. "Clearly, that's why customers used us." But the NYSE's Hybrid model, he says, destroyed that old model, without giving floor brokers the tools to represent orders as agents effectively in an electronic environment. Scores of brokerages couldn't persevere, and closed shop or merged with other firms to consolidate their business.