Street Ponders NYSE Alternatives
Wall Street Letter
04/30/03
--Raúl Gallegos and Jessica Toonkel
InstitutionalInvestor.com
Investors and traders frustrated with what they view as the New York Stock Exchange's arcane ways and concerned about the ongoing specialist investigation are beginning to rethink their business strategies with one common thing in mind: avoid NYSE specialists. Institutional investors are now seeking alternative venues to get their orders done and floor brokers and alternative trading platforms are trying to capture that business. A Big Board spokeswoman declined to comment. Specialists and floor brokers said that as of last week they had not seen any indication yet that investors are taking business away from the NYSE or reducing orders placed directly with specialists.
Big Board officials are investigating five of the seven specialist firms on the floor to see whether they unduly benefited by stepping between customer orders to make a profit. Specialists are obligated to make markets for stocks on the floor but must first pair customer orders before they can buy stocks for their own account. Specialists have always been a polarizing figure on Wall Street and more recently complaints about their role have risen as they began handling orders that investors send to them electronically. The ongoing investigation centers specifically on those types of orders, according to exchange insiders.
Under the circumstances, many on Wall Street stand to gain from the exchange's woes. In the short term, floor brokers at the Big Board could gain new business as investors stop sending their 5,000 or 10,000 share orders electronically and choose instead to process those manually hoping to get a better deal, specialists and brokers agreed. "If mutual funds and hedge funds can just re-route their trades elsewhere with the touch of a button they will," said a veteran floor broker at the exchange. But they will also consider the costs of doing that, the broker added. Despite this, some buysiders dislike a more manual approach. "The more manual the process, the more it is open to flaw ...and information leakage," said Peter Jenkins, head of equity trading at Deutsche Asset Management. "The institutional community has been calling for technological changes to make the process more efficient." To many this means the exchange needs to improve its automatic execution option, where the specialist can't interfere, and make it available to more frequent and larger orders.
Investors seeking a faster, more efficient way to trade are likely to turn to electronic execution venues such as the Nasdaq Stock Market's Inter-market service or Reuters' Instinet, among other alternative markets. "Clients ask us for ways to get around the specialist to get their orders done," said Sanjiv Gupta, head of research and strategy for Bloomberg Tradebook. Gupta says his firm also offers an anonymous execution service where clients orders are executed both electronically and through brokers on the floor of the exchange where more liquidity lies. Instinet offers a similar service, said Andrew Goldman, spokesman. "We [already] do about 5% of the volume of [NYSE] listed securities," said Goldman.
Members of the exchange concede that many now debate the usefulness of the specialist auction model at the Big Board, but they believe this can survive. Last year regulators decided to alter the rules protecting the NYSE from competitors, and that's a step in the right direction, said Goldman. "We're not asking for an affirmative action program for 211 years of monopoly but if we could now compete in a level playing field [against the NYSE], that would help the investors," Goldman added. But exchange members still hope the investigation won't find any wrongdoing. |
