Change, not obsolescence, seen for NYSE specialists
Reuters, 10.27.03, 2:59 PM ET
By Javier David
NEW YORK, Oct 27 (Reuters) - The New York Stock Exchange's specialists are under heavy pressure from without and within, but few expect the Big Board to completely replace its open-outcry auction system with a computerized model.
Specialists -- who manage the buying and selling of shares on the exchange floor in order to reduce market volatility -- have become a flashpoint of criticism in the wide-ranging debate of the Big Board's operational reform.
In recent weeks, several high-profile market participants -- most notably Fidelity Investments and American International Group Inc. (nyse: AIG - news - people) -- have called for the specialists, and the open-outcry system they utilize, to be scuttled in favor of an alternative that relies on technology.
The scrutiny intensified in mid-October, when the exchange accused five of its specialist firms of enacting their own trades before executing customer orders and stepping between customers whose trades should have been matched -- which could have cost clients millions of dollars.
The NYSE said it would seek "substantial fines" in sanctioning the specialists, which could force the firms to disgorge a total of $150 million.
But few experts see the criticism giving way to wholesale abandonment of the specialist system, even as the most recent calls for broad reform at the Big Board have emboldened the system's biggest critics.
"The system is defended on the grounds that you need human beings to intervene at appropriate times," said Frank Goldstein, a partner in securities law at Sidley Austin Brown & Wood in Washington, D.C.
"Among those who are calling for 100 percent technology...you see some sort of vested interest in technological change other than the public interest," he added.
Indeed, a recent research note by Merrill Lynch said that institutional investors might find that the liquidity of certain large stocks could be diminished in an all-electronic system. It also stated that the Big Board's volumes -- much larger than those of European markets -- needed a more hands-on approach.
VOICES OF REFORM
The 211-year-old NYSE, which is the last major exchange to use a system based on auctioneers, is under pressure to reform how it governs itself as it struggles to regain the public's trust after former Chairman and CEO Richard Grasso was ousted over his $188 million compensation package.
Central to the debate facing the exchange is the utility of its specialists, particularly as the prominence of technology in financial markets has grown in recent years.
Given the problems surrounding the trading practices of specialists, Hegarty questioned their continued dominance.
But even as he said the auctioneer model should be reformed, he stopped short of saying technology should altogether replace the exchange's open outcry system.
The NYSE has staunchly defended its system as a model of lower costs and minimized volatility. Skeptics of a fully technological model argue that the dearth of a human touch would increase volatility, particularly among stocks that see comparatively small flows.
"Anytime you put technology and automation in the middle its going to make trades go faster, so that will increase volatility. But what you have to weigh that against is (whether) specialist do what they're supposed to be doing, which is ensuring a fair and orderly market," he said.
With the advent of electronic exchanges, the NYSE's European counterparts have shifted to a model that is largely technological. As a result, some say the NYSE has left itself open to charges of failing to capitalize on technological innovation.
Which is not to say, though, that observers think the market would be better served without specialists.
"It strikes me as fairly radical to say that the system would be entirely transformed to electronic communications because from what I can see, there are valid arguments for when there are times that the intervention of a human specialist makes the market more efficient," Goldstein said.
Copyright 2003, Reuters News Service |
