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To: TFF who wrote (12238)	6/30/2008 5:58:56 PM
From: TFF	Respond to of 12617

NYSE May Change Specialist Rules By Edward Hayes June 30, 2008 The NYSE has rolled out a series of rule proposals that will change the way its long-running specialist traders handle business. The proposals come in the wake of increased competition from electronic exchanges and dark pools. At the NYSE, a specialist trader physically executes the trades for all the stocks of a particular company. As such, specialists are privy to a tremendous amount of information and essentially have a monopoly on all the stocks of a particular firm. That is why the NYSE imposes a number of restrictions on them, including prohibiting them from trading ahead of customer orders. As electronic exchanges, including the Nasdaq, continue to grow in popularity and as so-called dark pool exchanges are also becoming more mainstream, the Big Board is taking steps as a way to keep up with its competition. The latest proposals will cut back on some of the special privileges specialists have traditionally had, while granting them new freedoms. The biggest change under the proposed rules has to do with the title and privileges of the specialists. Previously, specialists could see an order before the market did. The rule proposal will eliminate that “look.” Specialists will now compete alongside everyone else. To accommodate the massive change to their position, specialists will be called Designated Market Makers (DMMs). “These proposals are a continuation of the NYSE’s efforts to modernize the exchange, and also to redefine the role of specialists, now proposed to be called ‘designated market makers’, which will look more like market makers on other exchanges,” said Susan Grafton, an attorney in the Washington, D.C. office of Gibson, Dunn & Crutcher. By changing some of the parameters, the NYSE is hoping to bring greater parity among specialist traders and traditional traders. “In the new model, specialists no longer function as the broker-dealer of record for every order, and do not ‘hold’ orders. Like specialists today, DMMs will be able to generate orders through a DMM algorithm that interacts directly with the display book,” the rule proposal states. By having the DMMs and other traders compete on equal terms, the NYSE is hoping that customers benefit through better pricing. And the exchange wants to eliminate a step in the order process to make it more efficient. The DMMs will still be responsible for maintaining a fairly liquid market to prevent the stock trading from becoming overly volatile. They will also maintain some of their affirmative commitments like capital commitment, under the proposal. And when there is an imbalance in the market for a given stock, the specialists must commit capital in order to correct the problem. While specialists will lose some of their privileges, they will also have new options available to them. The proposal is the latest step in the NYSE’s attempt to challenge electronic exchanges. Two years ago, the exchange introduced what it referred to as a hybrid model for executing trades. Under that system, an investor could chose to use either the traditional specialist or an electronic system. Over the past few years specialist traders have also been in the news for other things. Specifically, for some who attempted to take advantage of the system. The SEC brought charges up against 14 specialist traders and their firms, alleging that they cheated investors and frequently traded ahead of customer orders. A few years prior to that, the SEC sued the NYSE itself for failing to adequately supervise these specialists. Then the regulator went after the firms. The firms settled, but the traders are going through civil litigation with the Commission. (See story, click here.) The NYSE is hoping that by implementing the new rules, it will offer some of the same features exchanges as the Nasdaq, while maintaining its own unique identity. “The exchange is retaining specialists’ affirmative obligations to commit capital to their assigned stocks, but seems to be trying to address criticisms of the current model, such as by eliminating informational advantages specialists have from advanced looks at orders on their books,” Grafton said. The SEC is currently reviewing the rule proposals and will publish them for comment before voting on them. But some at the exchange are hoping to implement some of the changes as early as this August.