this is in today's IBD
Mutual Funds & Personal Finance
Friday, March 16, 2001
Printer-Ready Version
For The First Time, NYSE Opens Specialists’ Books
By Ken Hoover
Investor's Business Daily
The New York Stock Exchange is about to yield what was once considered its most cherished and profitable secret: the specialists’ order books.
Specialists run the auction in each NYSE stock. That gives them more supply-and-demand information than anyone. One of their tools is an order book, which lists and updates all of the limit orders for each stock they handle. Each stock has its own order book.
It’s valuable data for assessing the market moment by moment, even if it doesn’t tell the whole story. For more than a century, only specialists had it.
In June, the exchange will start posting the books on its Web site. Anybody can see them real-time for free for every stock, says NYSE Vice President Robert Britz.
Middlemen will sell the data to institutions and active traders in various formats they want.
This will let investors check a stock before making a trade. You’ll be able to watch the ebb and flow of supply and demand aroud the current price. If you don’t like what you see, you can step back until the situation improves. This might help you get a better price on your stocks.
Why is the exchange doing this?
James Angel, a Georgetown University finance professor, thinks the NYSE is looking over its shoulder. It sees foreign exchanges closing their trading floors, moving to computer systems like the Nasdaq. It sees the Nasdaq getting nearly twice the NYSE’s daily volume.
"Competition is a great motivator," Angel said. "They know they can’t do things the way they did them in the 20th century and still be around for the rest of the 21st."
Some people think the NYSE is a dinosaur. Many traders at mutual fund companies think they’ve gotten better prices on the Nasdaq since new order-handling rules were adopted in 1997.
Opening the books is one of several major changes the NYSE is working on to keep pace.
How can you use a book?
For ordinary investors, it might not be that useful. But short-term traders might check how many orders are above and below the market price before making a trade. A book will give you the number of orders at each price. It will also show how many shares are available at each price.
If thousands of shares are for sale just above the market, you might hold off. That supply could reduce the chances the price will rise in the short run.
At least that’s the way it works in theory.
Right now, the NYSE is under siege over how decimal trading works. Big mutual fund companies are furious that specialists and floor traders are stepping ahead of their orders. And it’s affecting what’s on the books.
In brief, this is what’s happening: A mutual fund tries to buy a block of stock at, say, 20. A savvy floor trader steps ahead, buying at 20.01. Since traders can see that the fund’s big buy order is still outstanding, the price is likely to rise.
The trader waits to see if the share price rises to, say, 20.10. If it does, he then sells for a quick profit. Meanwhile, the fund’s order remains unfilled at 20. If the fund really wants the stock, it might be forced to buy at 20.10.
With decimal trading, there are 100 spots between each point instead of 16 with fractions. That gives a sharp-eyed pro plenty of room to maneuver with little risk. If his scheme fails and the price drops, he can sell to the fund at 20. He’d lose only a penny a share.
As a result, big traders are reluctant to post limit orders on a specialist’s book, at least for now.
"It’s a list of fools," barked John Wheeler, head trader for American Century Investments.
Wheeler and the rest of the mutual fund industry are demanding rule changes to protect big limit orders. NYSE Chairman Richard Grasso assigned committees to look into the issue. He promised results by April.
Even with the books, investors at home won’t get the whole picture. Institutions often use brokers to work their trades on the floor. Or they arrange trades by phone directly through brokers. Either way, they’re making trades that aren’t posted in an order book.
"It’s not what’s shown that’s interesting," said Wayne Wagner, chairman of Plexus Group, a consulting firm. "It’s what’s not shown. And the reason it’s not shown is it’s too interesting. If a mutual fund has 500,000 shares to get rid of, it’s not going to show it to the specialist or the floor."
Big institutions don’t want anyone to know what they’re trading. It will drive the price higher or lower.
If nothing else, order books will be displayed on a spiffy Web site at nyse.com. It’s called MarkeTrac and gives a 3-D view of the exchange floor and information about stocks.
But don’t underestimate the books’ value, even with limitations that seem to exist now. Most experts think the controversy over decimals will be resolved.
"Anything that furthers transparency is good for all," said Andrew Brooks, head trader at T. Rowe Price. "We’ll use it to find depth, where the orders reside. But it’s early. We haven’t seen it yet."
The Nasdaq is coming out with a similar system to give investors more information about market depth on its stocks. It’s called SuperMontage and is due for rollout early next year.
The electronic communications networks, or ECNs, like Island, have led the way in opening their order books. Island publishes its books on the Internet at island.com.
Rob Hegarty, a researcher at Tower Group, which advises big traders, sees another benefit from opening the books.
"Changes that improve transparency and that give more information about the market tend to increase trading," he said. In other words, people are more likely to buy if they know the score.
Opening the books is one of several innovations at the NYSE.
Another is a new kind of order called Direct Plus. It’s designed to give the retail investor a chance for direct access to the floor and automatic execution at the market price.
It’s for the investor who wants speed and certainty and doesn’t care about a chance to better the market price by a penny or two.
"It requires no human intervention whatsoever," Britz said. "It happens without the specialist’s action." The average trade should take 2.3 seconds instead of 15, he adds.
The maximum size is 1,099 shares. That’s 1,000 shares plus an odd lot.
But online brokers aren’t excited.
IBD checked with several. None plan to put it in their Web sites.
"We’ve worked hard to ensure our customers get fast and accurate execution, and we think we can do that best through the specialist system," said Jim Griffin, Fidelity Investments spokesman. |
