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September 17, 2008

NYSE Floor Brokers Welcome Algos

By Nina Mehta

Floor brokers last month gained the ability to shoot algorithmic orders into the New York Stock Exchange's order book from their handheld trading devices. This capability enables them to compete with upstairs brokers, who've been able to piece orders into the market since Hybrid was launched.

The initial set of NYSE-sponsored algos was developed for floor brokers by quantitative technology vendor Pragma Financial Systems. The NYSE said it expected to supplement the Pragma offering with algos from vendor Deep Value by the end of the summer. Down the road, the exchange expects large brokers or third-party providers to also offer algos to floor brokers, according to Michael Rutigliano, vice president and broker liaison at the NYSE.

"The algo solutions will allow brokers to compete on an automated basis, in addition to their other capabilities," Rutigliano said. Indeed, the algos could give floor brokers, who've seen their share of the exchange's volume dwindle to 6 percent, new opportunities.

Unlike the algos that upstairs brokers get from Goldman Sachs, Morgan Stanley, Lehman Brothers et al., the NYSE-sponsored algos have trading parity on the Big Board. That enables them to execute as volume transacts, while upstairs algo orders, which are subject to time priority along with other orders at a given price, must wait their turn. "Parity is a huge benefit," Rutigliano said. "Floor broker algos can provide, to their customers, a unique opportunity to participate in every trade at a particular pricing point." Parity dictates the allocation of incoming marketable orders among exchange participants.

David Mechner, president of Pragma, whose TradeEngine algorithmic trading platform is used by a number of brokers, said his firm "tuned" its algos to take into account the needs of floor brokers. For the percentage-of-volume (or participation) strategy, for example, Mechner said Pragma gave floor brokers "additional flexibility to allow them to provide liquidity when they want to, versus [automatically] participating more aggressively."

Many participation algos, he explained, take an aggressive approach to prints. So when a print crosses the tape, those strategies may trade with a marketable order. The participation algo Pragma created for floor brokers instead "amortizes the shortfall [the algo is] accumulating, based on the volume printing on the tape, to allow the algo to provide liquidity as a way of achieving that volume," Mechner said. Essentially, that means the algo can be less aggressive in response to a large print even as it tries to catch up with the volume.

Pragma's strategies include volume-weighted-average-price, percentage-of-volume, arrival price and adaptive algos. The algos allow brokers to peg orders to the NYSE's best bid or offer and the NBBO. In a high-frequency trading environment, this choice may enable floor brokers to interact with more volume.

The NYSE-sponsored algos may eventually be used by floor brokers to route orders from their handhelds to other markets. The NYSE is working on a sponsored access arrangement with a routing broker to enable floor brokers to route to other markets from their handhelds. Currently, they can route only from their booths.

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