Eric, I think it may have been you, but in any event I recall some recent discussion on trading NYSE stocks. Here is an interesting article from today's WSJ. The NYSE is considering an 'ECN like' network for smaller trades...
Regards,
John
November 5, 1999
NYSE Considers Electronic System
To Fill Small Trades Automatically
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
The New York Stock Exchange is considering one its most
radical changes in 20 years: a new electronic-trading system for
automatically executing small orders.
While responding to the threat of electronic competitors and
potentially giving small investors faster, cheaper trades, the
exchange's new system would also, for the first time, cut floor
traders out of a potentially big share of its business.
Under the proposal, orders under 1,000 shares could be
immediately executed at the best price then available on the
exchange, rather than joining the "auction" managed by a
designated floor trader, known as a specialist.
"It's a pretty big change: the first time the
exchange is routing orders away from
the specialist," a person familiar with the
proposal said.
Although about 90% of the NYSE's
orders are delivered electronically already, over its DOT system,
the actual execution of the trades is still done manually.
The proposal is at the preliminary stage, and there is no
assurance it will ultimately be adopted. Thursday, Big Board
spokesman Richard Adamonis declined to comment. But the fact
the exchange is considering such steps shows the competitive
pressure it faces.
While embracing automated delivery, the Big Board for decades
has resisted demands to automate the execution of orders,
arguing an investor's order got the best price through interaction
with other investors on the floor. But in recent months it has come
under pressure from its largest member brokerage firms to
respond to the competitive threat of cheaper, faster trading
systems known as electronic-communications networks, or
ECNs. Such systems can execute trades in a few seconds, while
the Big Board on average takes 22 seconds.
The current proposal, dubbed "fast execution" internally, would in
effect create the stock exchange's own ECN for small orders,
executing trades in three seconds or less for investors who want
it, people familiar with the proposal say. The system would also
enable the exchange to easily extend trading hours without fully
staffing its floor at night, people briefed on the proposal say. It
could also give the Big Board its long-sought platform for trading
the competing Nasdaq Stock Market's issues, such as Microsoft
Corp. and Intel Corp., although that isn't part of the current
discussions.
At the same time, the exchange is attacking its costs by
proposing to eliminate specialist commissions on any DOT order
executed less than five minutes after arriving at the floor. That is
up from the two minutes proposed just two months ago.
Wall Street dealers such as Goldman Sachs Group Inc., Merrill
Lynch & Co., Morgan Stanley Dean Witter & Co. and Citigroup
Inc.'s Salomon Smith Barney are the Big Board's biggest
customers and like to do business there because of its deep pool
of orders and regulatory reputation. But those firms also worry
about Internet brokers and ECNs eating into their franchises, and
want the Big Board to help them respond with faster and cheaper
trading. As a hedge, these firms have also invested heavily in
trading systems such as Archipelago Holdings LLC and Primex
Trading NA LLC, which could one day compete with the stock
exchange.
ECN Share Could Change
At present, ECNs have almost no share of Big Board volume, but
that could change. Chicago-based Archipelago, for example,
which counts Goldman, Merrill and J.P. Morgan & Co. as
shareholders, plans to start executing Big Board stock trades in a
few weeks (it executes only Nasdaq orders now), and to later
register as a full-fledged stock exchange.
This raises the risk that stock trading will fragment among
multiple venues, leading to chaotic and unfair pricing -- especially
with next year's switch to decimal prices.
To prevent that, the Securities and Exchange Commission has
begun a concerted campaign to sweep aside some of the
regulatory barriers to integrating electronic-trading systems with
the traditional markets. SEC chairman Arthur Levitt has proposed
the Big Board put its orders into a central book along with those
of all other markets, including ECNs.
The Big Board began automating the delivery of orders in the
1970s with its DOT system (now called SuperDOT), and today
about 90% of orders representing about half of its volume travel
over SuperDOT. But all orders, upon arriving at the floor, must still
be executed manually by a specialist, after floor brokers have had
a chance to bid on the order. (The exception is "odd lots": Orders
of fewer than 100 shares are automatically executed.)
Sometimes the investor gets a better price as a result; for
example, when a broker pays him $100.125 for his shares when
the highest bid at the time was $100.
Under the current proposal, investors who chose "fast execution"
would lose the chance for price improvement.
Disenfranchising Floor Brokers
The proposal in effect disenfranchises floor brokers and
specialists from a sizable part of their business. But those so far
briefed on the proposal have been surprisingly supportive, people
familiar with the situation say.
Orders of fewer than 2,100 shares account for 80% of the Big
Board's transactions but just 23% of its total volume. (Data for
orders of 1,000 or fewer shares are not available.) Floor brokers
generally don't handle such small orders, and specialists have
lost a lot of that business to nonmember dealers and regional
exchanges and soon could lose more to ECNs. By offering, in
effect, its own ECN, the exchange might win some of that
business back or at least prevent further loss.
Even if the floor is not happy about the proposal, the threat of
electronic competition might quell any opposition. There is also
the hope it would spur more trading, expanding the business for
everyone.
The proposal is relatively new. An informal group made up of the
heads of Goldman, Merrill, Morgan Stanley and Salomon have
been urging Big Board Chairman and Chief Executive Richard
Grasso to move more to electronic trading, and in an interview a
month ago Mr. Grasso acknowledged their concerns: "They want
faster, cheaper, more-frictionless executions, and we are looking
at all sorts of combinations of technology to be able to provide
that kind of service, consistent with our model."
Mr. Grasso and two of his top lieutenants, Robert Britz, who is in
charge of market data and technology, and Catherine Kinney,
who is in charge of new listings and client services, broached the
proposal last week with several floor members.
Still, it isn't clear whether the proposal will go far enough to satisfy
Wall Street firms, which almost every month invest in a new
system meant to address some perceived shortcoming of the
floor.
Just last week, a group of big investment dealers, including
Morgan Stanley, Warburg Dillon Read LLC, and Lehman
Brothers Holdings Inc. announced it would build a new trading
system called Nyfix Millennium, which would skim from the orders
that dealers send to the floor any that can be matched internally
among the consortium partners. The system would run on wires
already maintained by Nyfix Inc. which connect the dealers to the
floor. |
