Last week’s announcement by NYSE Euronext of plans to revitalize its faltering New York Stock Exchange unit by freeing its specialists to trade more and better hedge their risks sends a strong signal to the industry that the company still sees value in its floor model.
It’s a risky bet, some say.
Despite a continued drop in both market share and total volume at the NYSE this year, NYSE Euronext management continues to believe there is a role for a marketplace characterized by specialist support and less than strict price and time priority.
The majority of orders are traded electronically at the NYSE, but the new proposal shows officials are not ready to merge trading onto the NYSE Arca platform, as many expect. (The NYSE does plan to move trading to Arca in the event of a disaster, however, as it is shutting down its back-up floor.)
“The overarching goal here is to aggregate liquidity and to make the specialist more effective at the point of sale while maintaining the traditional obligations they always had,” Todd Abrahall, NYSE vice president, specialist liaison and market development, said. “In order to get the specialist to deploy capital more freely, we had to look at our ruleset and see what makes sense. And what makes them competitive. And what gives the customer the best benefit.”
Last September, the NYSE was trading 1.4 billion shares per day on average, giving it a market share of 44 percent. This month, the NYSE is trading 1.2 billion shares per day, giving it a market share of 29 percent.
The plan is to reverse that trend by improving turnaround times, providing floor brokers, specialists, and upstairs traders with better tools and bringing the specialist back into the market.
Broadsided by electronic trading in the NYSE’s hybrid market, the specialist is practically non-existent in the market today, participating in no more than 2 or 3 percent of all trades.
Proposed rule changes, if approved by the Securities and Exchange Commission, could change that.
Under the proposal, the specialist, now known as a “designated market maker,” will lose his negative obligations that require him to avoid trading if not necessary; retain his affirmative obligations to maintain a fair and orderly market; take on new quoting responsibilities; gain new freedom to hedge positions; lose his look at incoming orders; and, perhaps most important, trade on parity with orders sitting on the NYSE book.
The belief is, Abrahall says, that the specialist will quote tight markets more often. That will, in turn, bring large order traders back to the floor.
“The customer wants best execution and doesn’t want to have to spread that execution across multiple venues,” Abrahall says. “He just wants to seek liquidity.”
Abrahall predicts an increase in flow coming to the exchange, but his view is not universally shared.
Jamie Selway, chief executive of institutional brokerage White Cap Trading, predicts the changes will cause the NYSE to actually lose market share. In revitalizing the specialist, the proposal slights upstairs limit order traders, Selway argues. They won’t want to be on parity with specialists.
“We’ve learned over the past year-and-a-half that limit order users are probably more important than specialists or floor brokers,” Selway says. “That is why the NYSE went from an 80 percent share to 29 percent. [With this proposal] they are helping the less important constituency and hurting the more important constituency.”
The NYSE hopes to phase in the changes during the third and fourth quarters of this year.
