Specialists Wary of NYSE Hybrid
John Thain has a bold plan to turn the NYSE into a fast market, but some specialist firms are saying "slow down."
In theory, New York Stock Exchange (NYSE) CEO John Thain's proposed "hybrid" trading system—a marriage of electronic trading and the traditional open outcry auction—sounds good on paper.
Some top specialist firms, however, are expressing deep reservations about the threat that electronic trading poses to their very livelihood. And they are making themselves heard.
Further, Thain's myriad of proposed hybrid benefits—such as automatically matching best bids or offers when they're published by another market center offering automatic execution or being able to offer tighter spreads and deeper liquidity to investors—are apparently not enough to calm the nerves of the specialist firms serving the NYSE.
If approved by the Securities and Exchange Commission (SEC), the hybrid system would expand the current Direct+ system-which currently accounts for about 10 percent of NYSE trades-by allowing large volume trades. Limits would be eliminated on size, timing and order types currently submitted via Direct+. This would, as Thain expressed in his NYSE Hybrid Market Initiative—posted in late summer on the NYSE Web site—would benefit investors, listed companies and markets.
Some specialists beg to differ. In a May 18 letter to a subcommittee of the SEC, Bear Hunter CEO Dan McCabe enumerated the ways in which the hybrid system would hurt specialists. "I am worried about the impact of the proposed changes, not only on the individual investor, but also our listed companies and the New York Stock Exchange itself," McCabe writes.
"I am deeply concerned because the thrust of these new regulations is focused on speed only; and speed will ferment both price and temporal volatility in the market, scaring off individual investors, destroying confidence and, over time, driving down the market cap of our clients," McCabe says.
McCabe elaborates by stating that excessive volatility serves no one but professional investors. "When millions of investors get home tonight and check on their 401(k) programs, they will carefully watch the prices of their stocks and mutual funds," he says. "I can't believe a single one of them will wonder whether their shares traded in five seconds or eight."
McCabe agreed to let Waters' sibling publication Dealing with Technology use portions of his letter, but declined to comment any further on the hybrid proposal.
DWT also tried contacting other key specialist firms such as Van Der Moolen Holdings and Kellogg Group, but officials there declined to comment. NYSE officials continued their press blackout also.
However, a source from a specialist firm stresses the issue of trust, which is important for the Big Board, in part because specialists bring liquidity. The source, who requested to remain anonymous, says that the auction model gives people the best price, with buyers meeting sellers directly. Also, the small investor is on a par with large investors in an auction, and pricing is transparent, the source explains.
Even so, the specialist source harbors some optimism about the hybrid system. "I think it's going to do a lot toward addressing the needs of our customers, who want auto-execution capabilities, but also want the auction in place when discovery takes place," the source says. This generalization applies to most of the customers that the source deals with. "The hybrid is the next logical generation of electronic delivery systems," the source says.
The more people have access to electronic trading, the more they'll use it, according to the source.
Yet while the specialist source is positive yet cautious, McCabe remains critical of the Thain proposals. "I think the logical outcome of these proposed rules will be dramatic fragmentation and internalization, where sophisticated investors opt out and the common person is left behind," he says. McCabe offers a solution, which he says "is not to develop a bifurcated market for insiders and small investors, but to instead link all the markets together."
This article originally appeared in Dealing with Technology.
by Laurie Wiegler |
