More Than The Floor
Neil Weinberg, 10.15.03, 8:08 AM ET
NEW YORK - The Archipelago Exchange is in the unenviable position of competing with the mighty New York Stock Exchange in the business of trading listed shares. Archipelago's selling point is an all-electronic trading system that, it claims, offers traders virtually instant execution.
There's only one problem. Even when its customers offer the best prices in the nation, the NYSE often ignores them and "trades through" at inferior prices, the Chicago-based exchange claims. That, in turn, prevents Archipelago from picking up business, and investors on both sides of the trade from getting the best prices going, it adds.
The problem is so bad that Archipelago has installed a program dubbed Whiner to automatically protest and request compensation from the NYSE every time it allegedly breaks the trades-through rules. Lately, Whiner has been whipping off about 2,000 complaints per day but often is merely ignored, Archipelago says. Archipelago has also filed complaints with the U.S. Securities and Exchange Commission and is awaiting a response.
New York's cavalier attitude was epitomized when Archipelago officials and institutional clients visited Robert McSweeney, the NYSE's senior vice president for competitive position, two years ago, says Archipelago's general counsel Kevin O'Hara. When McSweeney was presented with an example of how New York had ignored an Archipelago client's offer of 300 shares at a price of 2 cents per share better than New York offered at the time, McSweeney took $6 out of his pocket, handed it over and said "What else can I do for you?" says O'Hara.
McSweeney denies any such thing occurred. Whatever the truth, longstanding complaints that the NYSE maintains its dominant position by throwing its weight around are likely to get increasingly close scrutiny. In addition to the flap over former Chairman Richard Grasso's $140 million retirement package, the NYSE itself is investigating five of its seven market-making specialist firms for improperly profiting off customer orders. What's more, the exchange's top customer, Fidelity Investments, joined numerous other critics and this week called for abolition of its 211-year-old floor-trading system. Any changes would have major implications for companies that are market makers at the NYSE, including Spear Leeds & Kellogg, which is owned by Goldman Sachs (nyse: GS - news - people ), LaBranche (nyse: LAB - news - people ) and FleetBoston Financial's (nyse: FBF - news - people ) Fleet Specialist.
"I think we're going to see action and the system's going to be opened up," says John C. Bogle, founder of the Vanguard fund group and a director of Instinet Group (nasdaq: INET - news - people ), an electronic NYSE rival. "The stock exchange, this icon of American, if not world capitalism, has flaws that make it difficult to trade NYSE stocks anywhere else."
The NYSE's ability to maintain a rock-solid 80% share of listed trading strikes many as uncanny in an era when the Nasdaq has lost four-fifths of its volume to electronic rivals. For its part, the NYSE argues its strength derives from posting the best prices anywhere for listed stocks 94% of the time.
The only reason the NYSE ignores Archipelago's prices is that they are often unreliable, charges NYSE competition chief McSweeney. "Archipelago's performance is extremely poor," he says. "They cancel 42% of their trades."
Archipelago acknowledges its clients can cancel orders as long as they remain on its own electronic system. But if the NYSE is offering the best price and Archipelago sends an order there, it is locked in for 30 seconds or more--and thus offers no valid reason for New York to ignore them, Archipelago claims.
A head trader at a large institution that operates on both exchanges agrees that current rules tilt the playing field in New York's favor. He cites a case in July when he offered to sell 4,000 shares of Sysco (nyse: SYY - news - people ), a food distributor, for $29.82 each, on Archipelago. Instead of buying them, the NYSE specialist who makes a market in Sysco bought several 4,000-share blocks in New York at $29.90 per share before accepting the lower offer from Archipelago.
Because current rules give New York 30 seconds to respond to the lower offer, technically it did nothing wrong--despite the fact that investors in New York likely paid more than they had to and the Archipelago trader was left high and dry for half a minute, a virtual eternity in the trading world.
The experience "speaks volumes about what is wrong with the current market structure and why the competitive landscape will never change without your help," the trader wrote the same day to Annette Nazareth, director of the SEC's division of market regulation. The commission does not comment on such communications, a spokesman says.
"Bob McSweeney says investors will vote with their money, but that's not possible with the monopolistic trading practices we have today," says Seth Merrin, chief executive of Liquidnet, an NYSE rival that matches institutional orders directly. In a cautionary trend for the NYSE, its share of block trades involving 10,000 or more shares, has fallen to about 35% from 52% over the past two and a half years, according to Merrill Lynch. |
