Has NYSE's Trading Model Caused More Volatility?
By An Industry Executive
Aug 2, 2007 at 05:33 PM ET
Contributed by Joseph Saluzzi, Partner and Co-Founder of Themis Trading, an agency only institutional brokerage firm.
Trading on NYSE listed stocks has changed and investors need to be aware of the consequences.
If an average investor were asked, where is volatility greatest—the NYSE or the NASDAQ—most would probably respond that the NASDAQ has more volatility. Up until recently, they were probably correct. A study performed in April 2005 by the US Office of Economic Analysis found that, “On average, stocks experience a significant decline in intraday volatility upon moving from the NASDAQ to the NYSE”.
And why is that? “A major reason…is the role NYSE specialists play,” says the NYSE Euronext’s Web site. “The specialists have an affirmative obligation with regulatory accountability to cushion price movement and dampen volatility. They commit capital to dampen volatility and reduce the impact of institutional orders.”
Since the introduction of Regulation NMS and the NYSE Hybrid market, however, electronic trading has become the dominant method for trading NYSE stocks. Market share by the NYSE on NYSE listed stocks has dropped dramatically over the past year. In the second quarter of 2007, NYSE reported 63% of matched volume in NYSE Listed issues (down from 75% in the second quarter of 2006).
A recent example of this trend of increased electronic trading of NYSE stocks occurred on August 1, 2007. A rumor hit the market around 10:30 am that Beazer Homes (NYSE: BZH) may file for bankruptcy. The stock started to sell off immediately. Within 20 minutes, it plunged 37%, to $8.12 and the entire housing sector (including TOL, KBH and PHM) sold off quickly in sympathy. At 11:30 am, BZH issued a statement saying that the rumor was false. This led to a rally in BZH and the rest of the housing sector, which led to a recovery in the sell off to their pre-10:30 am levels.
If the electronic trading alternative was not available, the BZH specialist on the NYSE would have been more in control. Seeing the imbalance in sell orders, the specialist would have stepped in and committed capital to take the other side of the trade. Or they would have requested a trading halt. By performing either one of these actions, the specialist would have mitigated the initial and unwarranted plunge, and the subsequent spillover to the rest of the sector and the overall market would have been limited.
As a result of a large share of trading on NYSE listed stocks being done electronically, the specialist now has different motivations. The desire to commit capital has been diminished due to the lack of profits being derived from the specialist activities.
To sum up, NYSE stocks are essentially traded the same way as NASDAQ stocks now (except for the opening and closing trades). Investors need to be aware of this change and adjust their strategies accordingly. |
