The New York Stock Exchange, in an attempt to boost the face-to-face interactions that once characterized trading on its floor, quietly rolled out an electronic communication tool for floor brokers last month. Called BlockTalk, the product was designed by the NYSE in collaboration with Micro Design Services, the maker of floor brokers’ handheld trading devices, and is available on those handhelds.
BlockTalk, ironically, is an electronic tool intended to facilitate human interaction between floor brokers. Traders can broadcast messages indicating their interest in a particular stock to other floor brokers, who can respond via their handhelds and then go on to have an in-person conversation.
Previously, floor brokers met other brokers with contra-side interest at the specialist’s post for that stock, where they could negotiate for size and price. BlockTalk therefore steps into the breach created by the reduction in activity on the New York’s floor and the resulting decrease in information available at the point of sale.
“This product is meant to attract and identify block-size liquidity,” said Michael Rutigliano, vice president and broker liaison at the NYSE. About 90 percent of the 350 floor brokers at the exchange have used BlockTalk since it was rolled out on May 22, he said. From development to launch, the product’s incubation at the exchange took less than two months.
Rutigliano declined to say how much volume is being transacted daily as a result of BlockTalk-generated interactions, but he noted that the NYSE is “very pleased with the amount of activity” it has seen in the product’s first month of use. The largest single transaction a BlockTalk communication yielded was a half-million-share trade in early June in a foreign ADR. The NYSE’s overall average execution size is about 250 shares.
Manual executions by floor brokers represent about 6 percent of the New York’s volume. The NYSE’s market share in its listed names was 30.5 percent this month through June 20, down 1.3 percent from its May market share, according to data from Equity Research Desk, an investment advisory firm.
BlockTalk allows brokers to do three things: They can broadcast Broker Interest Alerts, subscribe anonymously to alerts by symbol, and reply to alerts they receive. The pre-formatted broadcasts include only the broker’s badge number and the symbol, with no price, size or side information disclosed. The responses are equally bare-bones, with just the replier’s badge number. The floor brokers can then meet at the post for a conversation.
According to Rutigliano, BlockTalk is “intentionally sanitized” in terms of the information conveyed. The product facilitates “what floor brokers do and [what] electronic competitors can’t do: have discovery dialogues,” he said. If a trade results, the specialist currently prints it. Many of these transactions are manual and not electronic, Rutigliano added.
BlockTalk is a sign of the times, given the reduced role of floor brokers and specialists at the New York. “The point of sale used to be a very verbal, very manual process,” Rutigliano said. “Now we’re in an environment where a lot of that activity occurs electronically in sub-second time. There’s far less opportunity to know who’s really doing what.” BlockTalk, he said, can help trigger size and price conversations between brokers that a specialist previously might have facilitated.
Jonathan Corpina, senior managing partner at institutional broker Meridian Equity Partners, agrees. In his view, BlockTalk takes over one of the roles specialists traditionally fulfilled. If a broker bought stock for two days, he said, and on the third day a seller walked into the crowd, the specialist would let the first broker know about the new seller. “He acts as a catalyst who matches a buyer and seller together to have a conversation,” Corpina said. “Now, that’s happening electronically [via BlockTalk] and that takes the onus off the specialist to match up buyers and sellers.”
Indeed, BlockTalk keeps the conversation between just the two parties. The floor broker no longer must disclose his interest to the specialist. It “keeps the specialist 100 percent out of the equation,” Corpina said. “The specialist doesn’t see these broadcasts, and that’s very attractive to customers.” Corpina is president of the 350-member Organization of Independent Floor Brokers.
Corpina notes that customers can also benefit from BlockTalk by having a floor broker subscribe anonymously to alerts in certain names without necessarily giving the broker the actual orders. “I’ve been in situations where I had an interest in a stock, subscribed to watch the name, discovered that there was a player on the floor with a position to liquidate, contacted my customer, negotiated a price, and traded the stock,” he said.
Craig Rothfeld, executive director at institutional broker WJB Capital Group, adds that BlockTalk could help to promote price discovery for large trades. “Liquidity will go wherever the best liquidity offerings are,” he said. “If the exchange can enhance price discovery through a block- or liquidity-type product, the liquidity will go there.” WJB, which got its start as a traditional floor operation but is now primarily an upstairs broker, currently trades only 10 percent to 15 percent of its listed volume on the floor with brokers.
“Customers don’t want to feel they’re missing liquidity opportunities,” the Big Board’s Rutigliano pointed out. “So if tools like BlockTalk create opportunities, there’s a greater incentive for people to be in this [NYSE] environment.”
According to Rutigliano, 1,200 of the exchange’s 2,700 common stocks are “listened to on a daily basis” through BlockTalk. He expects BlockTalk to be used for both liquid stocks and illiquid names, although the product may be “more valuable for less-liquid stocks where brokers must be especially mindful of information leakage and price impact.” Floor brokers can receive alerts in an unlimited number of names.
Currently, BlockTalk is not designed to allow floor brokers to indicate whether they’re a buyer or seller, or to broadcast messages only to brokers working an order on the other side or who were active in that name in the last few days. Rutigliano said the exchange is considering various “user-driven enhancements” to BlockTalk for the future.
The NYSE, working with vendor Micro Design Services, developed BlockTalk in a different form a couple of years ago, but that product was never implemented. BlockTalk’s technology was adapted for the current marketplace this spring. The product, Rutigliano added, is consistent with the exchange’s proposed new market model, which overhauls the traditional role and functions of specialists.