NYSE Will Pay Specialists for Setting Better Prices
By Edgar Ortega
Aug. 28 (Bloomberg) -- NYSE Euronext, owner of the world's biggest stock market, will replace a fixed-payment program for specialist firms with a plan that rewards them for setting better prices for investors.
The NYSE will pay the seven firms 25 percent of transaction fees and a portion of market-data sales based on how often specialists quote the best price for a stock, according to a regulatory filing. The exchange had previously paid the firms $8.3 million a month to help them adapt to a new trading system that lifted restrictions on electronic transactions.
The new payments, which start in September, are part of Co- President Duncan Niederauer's plan to stem a loss of business from the Big Board's trading floor to faster all-electronic rivals. Specialists such as LaBranche & Co. and Bear Wagner Specialists LLC will be rewarded for arranging more trades and quoting better prices than other exchanges.
``These changes allow specialists to participate more, which will help the marketplace,'' said David Humphreville, president of the Specialist Association, a trade group for the NYSE's market-making firms. ``This will narrow spreads and decrease volatility, and give us a favorable foundation for a healthy trading floor.''
Specialists are participating in about half as many trades after the exchange increased automation with the introduction in March of the Hybrid Market. The system has undermined trading opportunities for the firms, sparking a drop in transaction revenue and staff cuts.
Original Plan
Specialists are required by the NYSE to make orderly markets in the stocks they are assigned, including buying or selling when they can't match orders from other traders. The NYSE originally planned to drop the fixed payments on June 1 and switch to a payment system based primarily on the NYSE's market share of trading in its own stocks, according to a Nov. 30 filing with the Securities and Exchange Commission.
The plan announced today pays specialists based on the quotes they generate and the number of trades they execute under four performance-based categories, such as giving investors better prices or matching trades to avoid routing orders to rival exchanges. The payment is not directly tied to the NYSE's market share.
The NYSE's total payout will be similar initially to the $8.3 million paid under the prior plan, Niederauer told analysts in a conference call earlier this month. It will then vary as volume and quotes at the NYSE increase.
Aligning Interests
``I'm trying to align everybody's interest, so that the specialist is motivated to perform better and be a more consistent liquidity provider,'' Niederauer said in the Aug. 2 conference call with investors.
LaBranche and Van der Moolen Holding NV are the only publicly traded specialists firms. The other five are either units of investment banks or privately held.
Shares of LaBranche slipped 25 cents to $6 at 4 p.m., while the U.S. shares of Amsterdam-based Van der Moolen fell 12 cents to $4477. NYSE Euronext lost $2.61 to $71.07 in composite trading.
Niederauer has met with regulators to update rules governing specialist transactions, many of which were drafted when traders still manually paired off buyers and sellers on the exchange floor. The NYSE also plans to make its trading system 90 percent faster over the next year to execute transactions in a hundredth of a second.
Big Board Shares
NYSE Euronext matched about 64 percent of the Big Board listed shares that changed hands this year through July, down from 72 percent for all of last year, according to data on its Web site. About two-thirds of the shares were matched at the Big Board with the remainder getting executed on the NYSE Arca electronic exchange.
Bear Wagner is a subsidiary of New York-based Bear Stearns Cos., while Spear, Leeds & Kellogg is owned by New York-based Goldman Sachs Group Inc. Banc of America Specialists is a unit of Charlotte, North Carolina-based Bank of America Corp.
Kellogg Specialist Group of New York and SIG Specialists Inc., a unit of Philadelphia-based Susquehanna International Group LLP, are private companies.
To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net .
Last Updated: August 28, 2007 16:23 EDT |
