Death to the specialists?
With Grasso gone, the New York Stock Exchange's specialist system could be next.
September 30, 2003: 10:56 AM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - The dominos are falling fast at the New York Stock Exchange.
First it was chairman Dick Grasso, who lost his job over his hefty pay package. Lead director H. Carl McCall tendered his resignation last week; DaimlerChrysler chief Juergen Schrempp quit the Big Board's board over the weekend. More departures are expected, as interim chairman John Reed works to clean house, and the Securities and Exchange Commission intensifies its inquiry.
Maybe the last domino to fall will be the NYSE's age-old specialist system.
Specialists, also known as market-makers, are viewed as an anachronism at every modern stock exchange but the NYSE. Their job: To match investors' orders to buy stocks with orders to sell them. If a big order to sell comes in and there are no buy orders, the specialist firm is bound to step in with its own money to match the order. This, the Big Board emphasizes, promotes an orderly market.
But the matching of buy and sell orders can be done electronically, critics point out, and the trading that results appears to be no less orderly than when there is a human middleman involved, who takes his cut. Furthermore, many investors believe that specialist firms regularly take advantage of their inside knowledge of how much buying and selling there is in any given stock.
"It's an archaic process," said Doug Kass, who heads up the hedge fund Seabreeze Partners. "It can be done with more rapidity, in a better pricing environment, skipping the third party in toto. I wish I could figure out a way to short seat on the Exchange."
Since he can't do that, Kass has reckoned the next best thing is to sell short specialist firm LaBranche, which he believes will eventually trade down to its cash level. He's also shorted Goldman Sachs, which bought Spear, Leeds & Kellogg, another big specialist firm, three years ago for nearly $7 billion. He thinks in the end Goldman will have to take an impairment charge for Spears.
LaBranche (LAB: Research, Estimates) has fallen 18.6 percent since Grasso's departure. Goldman (GS: Research, Estimates) is down 9 percent.
It's not the first time people have forecast the end of the specialist system. During the dot-com heyday, upstart electronic communications networks, known as ECNs, were supposed to eat the Big Board's lunch. So far they have not. The NYSE simply offers more liquidity than outfits like Instinet and is more attractive to institutional traders as a result.
But Kass thinks the specialist systems' continued existence owed much to Grasso, who fought tooth and nail to keep it alive. Now it has little more than existence value -- we like the idea of traders running around on the Exchange floor, shouting orders, wearing colored jackets, singing "Wait 'til the Sun Shines, Nellie," but that is all.
"The whole New York Stock Exchange reeks of the cigar-smoke filled room mentality and it's over," said Kass. "It's over because of Grasso's avarice and the avarice of the specialist cabal." |
