Floor Faze-Out
By ANDREW OSTERLAND
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FADING AWAY: Now that Dick Grasso's gone, critics of the New York Stock Exchange have turned their attention to the very existence of its system.
- Reuters
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October 19, 2003 -- New York Stock Exchange members may have been appalled by its former chairman Dick Grasso's $190 million money grab, but they soon may be missing his deft political touch.
With the 211-year-old institution under intense scrutiny, voices from several corners are now starting to call for the end of the specialist trading system - the human-to-human interaction that defines the Big Board's business.
This is nothing new for the traders, long vilified by a financial world eager to cut costs and embrace technology. But absent Grasso's PR skills and political clout, the roughly 500 specialists who work the floor find themselves with few friends.
"The specialist crowd is going to miss not having a staunch defender at the helm of the exchange," says one industry consultant. "They never needed to seek allies in the past-now they probably wish they had."
Last week, their own exchange rang up the five largest specialists for about $150 million in fines.
As the gatekeepers to the order flow in NYSE-listed stocks, specialists have long been the subject of muted complaints from institutional investors who say that don't get a fair shake on the floor.
Last week, mutual fund giant Fidelity, responsible for three to five percent of average daily trades on the NYSE, turned up the volume, suggesting that the exchange scrap its specialist system and move more aggressively towards computerized trading.
"There's never been [a better] opportunity in the history of the exchange to make this change," said Scott DeSano, Fidelity's head of trading.
And Hank Greenberg, CEO of insurance giant AIG, recently slammed the specialists in a Financial Times article.
He argued that the specialists do very little to cushion volatility in share prices. The responsibility of specialists is to provide a ready market in one or more shares listed on the exchange. When the prices offered by buyers of a stock don't meet those asked by sellers, the specialists take the other side of the transaction, thereby reducing price volatility in the market.
"We're here for the times when the market gets out of kilter," said Michael LaBranche, head of LaBranche & Co., the largest and only independent specialist firm at the NYSE.
In return for the liquidity they provide, specialists are allowed to use their knowledge of customer orders to trade for their own account. Institutional investors no longer think this trade-off is to their benefit.
The specialists don't facilitate trading in NYSE stocks, say critics; they get in the way. "Their interests are perpendicular to mine," said John Wheeler, head trader for mutual fund group American Century Investments.
Who will save the specialists? Grasso was a champion of the NYSE specialist system. Interim chairman, John Reed, likely won't be around when market structure issues are decided.
And SEC Chief William Donaldson may not be any more sympathetic at this point. Despite serving as chairman of the exchange between 1990 and 1995, his recent testimony before a Senate subcommittee suggests that major market reforms are in the works.
It's evolution, said Junius Peake, a professor at the University of Northern Colorado, and one of the most vocal critics of the NYSE.
If he's right, the floor traders may be dinosaurs, but they've already survived for 200 years. |
