NYSE Floor Brokers Confront `Hybrid Market' as Takeover Nears
March 2 (Bloomberg) -- Rodolfo Mass, a floor broker at the New York Stock Exchange for almost three decades, has seen the future -- and he's worried.
Just steps away from his spot on the floor, the exchange installed a trading program that enables automation to co-exist with face-to-face haggling. The so-called hybrid market is the centerpiece of the NYSE's transformation into a for-profit company by merging with Archipelago Holdings Inc. next week.
``Sometimes speed kills,'' said Mass, 47, a managing director at Direct Access Systems LLC in New York. ``There are going to be less people on this floor in two years' time.''
NYSE Chief Executive Officer John Thain says allowing investors to trade blocks of shares in fractions of a second will hone the Big Board's edge against all-electronic rivals such as the Nasdaq Stock Market.
For the 3,000 brokers and clerks who flock each day to the world's biggest stock exchange, it's the biggest technological overhaul since fully automated trading started 30 years ago.
The NYSE, whose share of trading in its listed stocks has fallen to a three-decade low, has little choice but to encourage use of computers. By the end of June, the exchange must comply with Regulation NMS, a U.S. Securities and Exchange Commission rule requiring brokers to send orders to the exchange that can execute them automatically at the best price.
Direct Plus
Thain is under pressure from institutional investors to speed trade execution and improve transparency as well. The NYSE's seven specialist firms, whose employees match buy and sell orders on the floor, paid $247 million in 2004 to settle regulatory claims that they profited at customers' expense.
Under the hybrid system, floor brokers have the option of completing trades through specialists or routing them through the NYSE's Direct Plus, a five-year-old electronic system that now handles about 14 percent of trades. The exchange plans to scrap limits on Direct Plus that bars orders exceeding 1,099 shares or coming less than 30 seconds apart.
To test the system, the exchange upgraded software in brokers' hand-held computers and started a 168-stock pilot program in December.
Trading posts that are marked with six-inch-long green plates reading ``e-Quote,'' like the one near Mass, now dot the floor. Brokers approach the post, punch a few keys, and make a wireless trade that sidesteps the specialists and hides larger orders from their competitors.
Testing, Testing
``They are bringing poker back in the game,'' said Andrew Frankel, co-president of Stuart Frankel & Co. in New York, an NYSE brokerage for 35 years. ``We are very bullish on the plan for hybrid.''
The pilot has been successful so far, said Louis Pastina, the exchange's senior vice president responsible for the hybrid market. Brokers are averaging about 375 e-Quote trades a day, up from 200 two weeks ago, according to the NYSE. The pilot runs through March.
All told, the NYSE will write a million lines of code for 60 computer systems to implement hybrid trading and to automate many of the specialists' tasks, he said. The exchange refuses to say how much it cost.
``The specialists have really been at a disadvantage because their method of responding is by punching keys on a keyboard,'' said Pastina, a 22-year veteran of the Big Board. He estimated that all of the specialists combined enter 40 million keystrokes a day, or as many as three per second per person. ``That's a very difficult model to continue to grow.''
Market Share
The exchange hasn't fiddled so much with its technology since the 1976 introduction of the Designated Order Turnaround System, a computer-based network that automatically sends small orders to specialists.
The hybrid system will operate parallel to Archipelago's all-electronic market. Floor brokers will gain access later this year to Archipelago to trade options or shares of Nasdaq-listed companies, Thain said.
The NYSE will complete the Archipelago deal, forming NYSE Group Inc., on March 7 and the combined company will go public the next day. Trading in Big Board-listed stocks following the merger is projected to increase 17.5 percent this year and next, according to a November regulatory filing.
Average daily trading at the NYSE rose 10 percent in 2005. At the same time, the exchange's share of trading in the stocks listed there fell to 71.7 percent in January, the lowest since data began three decades ago, from 79.6 percent a year earlier, according to the NYSE's Web site.
LaBranche Outlook
Specialist firms are moving to adapt to the hybrid market by installing computer systems and writing their own software. The system will incorporate programs that help traders decide how to handle incoming orders.
More automation could mean fewer floor brokers even if trading increases, Michael LaBranche, chief executive officer of LaBranche & Co., told analysts in January.
``If volumes stayed the same, then our headcount could go down significantly,'' he said. LaBranche's firm, based in New York, is the largest NYSE specialist.
The e-Quote system forces brokers to program trades ahead of time, hindering their ability to react to incoming orders, said Joe Gawronski, chief operating officer at Rosenblatt Securities Inc. in New York.
``This has the potential to weaken the NYSE's price discovery mechanism, which would put the NYSE in real danger of experiencing serious market share losses,'' Gawronski said. ``Superior pricing has been its competitive edge.''
`Heard That Feedback'
Some floor traders say the hand-held devices are hard to use. Warren Meyers, head of the 100-member Independent Broker Action Committee, said programming the e-Quote features is cumbersome and may inhibit floor negotiations.
``In concept, the hybrid is a wonderful thing,'' said Meyers, a WJ Dowd Inc. managing partner who has participated in two simulated trading sessions using the hybrid system. ``But the technology they are offering us is not sufficient to properly represent customers at the point of sale.''
Pastina said the exchange has ``heard that feedback'' and made the devices faster and easier to use.
``Change is always unsettling,'' he said. ``And brokers on the floor are going through a lot of changes.'' |
