Program trade may create new woes for NYSE traders
Wed May 19, 2004 01:20 PM ET
By Javier David
NEW YORK, May 19 (Reuters) - Firms that manage trading on the floor of the New York Stock Exchange, trying to emerge from a trading scandal, could face new woes from the crosswinds of increased program trading and diminishing volume.
The past several months have not been kind to the NYSE's elite market-makers, which buy and sell stocks in order to dampen market volatility.
They have had to contend with the after-effects of a $241.8 million settlement with regulators over trading abuses, and the prospect that both the NYSE and the U.S. Securities and Exchange Commission could institute changes that may empower their electronic competitors.
Program trading is customarily defined as the simultaneous buying and selling of one stock at a time. On the Big Board, an investor must buy and sell at least 15 stocks with a total value of $1 million or more.
In the latest week, the Big Board's program sales surged to a record 52.3 percent, on average daily volume of about 1.6 billion.
The strategy uses predetermined formulas to trigger buying and selling when the price of a stock changes in relation to other stocks or derivatives.
Such sales may also involve computer-driven executions -- which has become a big issue for specialists, as the NYSE reconfigures its trading rules to accomodate more electronic trading.
Program trading "is dilutive to (specialists') profitability," said Richard Repetto, an analyst at Sandler O'Neill & Partners in New York. "They are not able to interact and take principal positions like they can with traditional flow. I do think it's a negative."
Specialists can be involved in some program trades. An NYSE spokesman said that data did not distinguish between program trades executed by market makers or computer.
But analysts warn that the rise of automated trading platforms, combined with a seasonal fall-off in trading volumes, may conspire to diminish the specialists' ability to profit from trades.
The NYSE's five largest firms are Bear Wagner Specialists LLC (BSC.N: Quote, Profile, Research) ; Fleet Specialist Inc.; LaBranche & Co. LLC (LAB.N: Quote, Profile, Research) ; Spear, Leeds & Kellogg Specialists LLC; and Van der Moolen Specialists USA LLC (VDMN.AS: Quote, Profile, Research) .
In a research note this week, analysts at Jeffries and Co. rated the shares of LaBranche and Van der Moolen Specialists (VDM.N: Quote, Profile, Research) "underperform," citing the rise in program trading as "not optimal for specialists."
Program trading has been an integral part of securities markets for years without threatening market-makers' profitability. But several recent factors have emerged as force multipliers that challenge how specialists operate.
In addition to the NYSE's proposed changes, the SEC may alter trading rules to allow investors to forego the cheaper prices normally found on the NYSE in favor of the more expensive but quicker trades on automated platforms.
That is likely to exact a heavy toll on the Big Board's dominant market share, and traders' ability to make markets.
Specialists "live and die thinking about profitability. It's all about the economics," said an executive at one NYSE trading firm, who spoke on the condition of anonymity.
But the person added that despite the changes, "there is still a role for us. Specialists will adapt and make money." |
