Big Board Pilots First Phase of NYSE Hybrid Market
After months of preparation, traders on the NYSE floor put the upcoming NYSE Hybrid MarketSM to the test, trying out some of its key features as part of a pilot program involving 168 stocks. The pilot of the first phase of the Hybrid Market —the electronic and human-based auction trading platform that is pending approval from the Securities and Exchange Commission — began Dec. 15.
“The pilot is a small but important step toward creating a next-generation market that offers our customers the widest range of choices to access the world’s largest and deepest pool of liquidity,” said NYSE CEO John A. Thain.
The 90-day pilot allows users to ease into the new hybrid trading environment, rather than having to implement all the features of the full-fledged model all at once. It gives them practical hands-on experience, while giving the NYSE an opportunity to conduct real-time system and user testing of certain features of the new trading platform.
“It’s good to start with baby steps,” said David Miranda, a specialist with Van der Moolen who manages the stock of Valmont Industries Inc. (VMI), the first pilot stock. Mr. Miranda reported that in the first week of trading in the pilot hybrid environment, he did not detect any change in how the stock trades.
“I’m still trading where I would have before,” he said. “I’m still committing capital the way I did before.”
For each of the pilot stocks, brokers were able to use a feature known as e-Quote to enter bids and offers electronically, something they now do verbally with specialists. Meanwhile, specialists tried out the new s-Quote, which when fully functional will allow them to enter bids and offers either manually or algorithmically into the NYSE Display BookSM , an order-management and execution system for specialists that is best compared to the auction market’s engine. During the pilot, specialists enter s-Quotes on a manual basis only.
Santo Minero, president of brokerage firm Minero Securities, said that since stocks added early in the pilot aren’t actively traded, he’s been able to adapt slowly to using the new e-Quote feature. “It ’s different and will take a while to get used to, but it’s not difficult,” he said.
Several functions were automated as part of the pilot. For instance, the application of NYSE trading rules and regulations governing the handling, allocation and sequencing of order executions among multiple participants — a task historically performed manually by specialists — was automated, as were certain functions specialists performed in the handling and execution of complex orders known as stop orders and CAP-DI orders.
As of Jan. 3, the pilot was activated in 20 stocks. The pilot will last 90 days — until mid-March — unless the Securities and Exchange Commission approves the proposed NYSE Hybrid Market before then. If the SEC ’s approval arrives before the expiration of the pilot, the NYSE will be able to go live with the first phase of the new trading model across all stocks.
The proposed NYSE Hybrid Market expands the Big Board ’s electronic trading capabilities, while preserving the benefits associated with a human-based trading floor, namely lower volatility, tighter spreads, and better prices. Valmont Industries, for example, a manufacturer formerly listed on Nasdaq, experienced wide bid-ask spreads and high volatility while listed on the electronic-only stock market. Since it transferred to the NYSE ’s auction market, its volatility dropped and trading volume tripled, said Van der Moolen ’s Mr. Miranda.
With dual electronic and floor trading available at the NYSE Hybrid Market, customers will have more choice in how they wish to trade. If speed, anonymity, and certainty of execution are their priorities, investors can choose to have their trades done electronically without human interaction. If, however, they want a greater opportunity for price improvement—which the NYSE auction offers — they can choose to have their trades executed with the help of brokers on the floor.
“The Hybrid Market will enable us to execute orders more effectively than a one-dimensional electronic platform,” said the NYSE ’s Mr. Thain. “It will marry the best of electronic trading and the auction market in a way no other market can match.”
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