There is a major error in this article and one that is commonly made and assumed to be true about best price and the NYSE.
Quote from article:
"The trade-through rule currently prohibits an exchange from bypassing, or trading through, a better price quoted on a competing exchange."?
This quite simply is not true. I am a full time trader and hedge fund manager and I trade millions of share each and every month so I am aware of how it works. The trade-through rule on the NYSE prevents the bypassing of a customer order that is available at a better price and protects only those customers that have orders routed to the NYSE. So when the NYSE guarantees you the best price available, it only means the best price available in their respective order book. It DOES NOT guarantee the best price available from ALL of the other regional stock exchanges and electronic order books. So if I put in an order through a broker like Ameritrade, I may see my order come up on my quote montage represented as the regional PHLX (Philadelphia Stock Exchange). I may be the best price available in the whole country at that time with my limit order but if Schwab routes a market order to NYSE then it will trade right through me and my liquidity will not be taken. This happens each and every day to thousands of people. In effect, the claim of "we give you the best price available even though we may not be as fast as the Nasdaq electronic exchange" is really like a store owner saying "we guarantee the price of this jacket to the cheapest you will find in THIS STORE" (and that justifies the long single checkout line you will endure). So if the store next door has it at half the price and no wait, you still pay the higher price.
When one listens to the banter of the NYSE, it sounds like they are trying to make the NASDAQ as fair as they are. This is in fact a joke. The Nasdaq assembles ALL CUSTOMER ORDERS into what is in effect, ONE SINGLE electronic virtual order book and stacks them by price and then time preference. They in effect are truly giving you the best price available at the movement and doing it with instant electronic fills. Traders can take the inside bid or offer or do as they please. If I want to trade around and pay higher for some reason, I can. IT IS MY DECISION who I buy from and it has nothing to do with fairness. But the reality is I always take the inside price and do not trade around it. The extension to the rule to the Nasdaq was completely unnecessary since they are already far more fair and fast.
The saying that the NYSE may not be as fast as the NADAQ but you always get the best price is extremely misleading. You not only have the possibility of paying a higher price at the NSEY (by bypassing the regional exchanges), you also get to wait longer for the execution of that higher price while the specialist eats his Krispy Creme and gargles his latte.
The fact is that in this last vote there was a proposal to extend the rule through all of the Exchanges and make them compete with each other for the best price. This was HUGE and something that was very needed. But the NYSE fought it off vigorously since the only way the pull it off would be to link them electronically and thereby end the specialist system. This proposal is talked about in the article below. It could have wiped out the NYSE specialist system but the irony is it did not pass in this from and now they come away from it smelling like a rose.
Bottom line is this. If you have something to sell and I want to buy it….. How can us introducing a 3rd “for profit” person into the transaction get us all a better deal if they are getting a piece of the same pie?
Good Trading,
OZ
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Posted on this thread previously
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Proposal could end NYSE floor trading
By David Wighton in New York
Published: December 17 2004 02:00 | Last updated: December 17 2004 02:00
A controversial proposal unveiled by the Securities and Exchange Commission this week could spell the end of traditional share trading on the floor of the New York Stock Exchange, its chief executive warned yesterday.
John Thain said it would be "very difficult ... to maintain the auction process" if the proposal was adopted. It would "force everyone into a purely electronic model" he said on a media conference call.
Mr Thain's first public statement on the issue underlined the depth of the NYSE's concerns about the proposal which the five SEC commissioners voted to publish for comment on Wednesday.
The proposal would ban a stock trade being done on one market at a worse price than that on offer anywhere in the displayed order book of another market. The SEC is asking for comment on whether this would be preferable to its original suggestion which would limit such "price protection" to the best prices on offer at each market.
Mr Thain said that if the new proposal was implemented the human intervention involved in the auction process would be impractical, particularly in circumstances where there was disruption in the market, a big order imbalance or a dramatic change in price. These are exactly the circumstances in which supporters of the NYSE auction model say it adds value for investors. Mr Thain said the new proposal would make it very difficult to implement the NYSE's planned "hybrid model" which would combine the auction process with electronic trading.
The NYSE strongly supported the SEC's original blueprint Mr Thain said but the alternative proposal would harm investors by reducing competition between markets. This was because under the new proposal it would not matter on which market an investor placed an order because it would be price protected wherever it was.
He also said it would be likely to lead to reduced liquidity because investors would be less keen to display orders. "I don't think centralising and nationalising the market is in the interests of investors."
The original proposals were published in February then revised in May. But three weeks ago it emerged that SEC officials were recommending that price protection be extended to all displayed orders and that the SEC commissioners would be asked to vote on the plan without further consultation. After lobbying, the commissioners agreed to another 30 days of public comment. |
