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N.Y. Stock Exchange: The Futures of Trading

By Larry Dignan  |  Posted 2005-03-07 Print this article Print

The exchange wants to automate its trading systems. But many clients prefer dealing with human specialists. How John Thain will try to reach both objectives.

Doreen Mogavero's marching orders appear on a screen in her cramped booth on the New York Stock Exchange floor: Sell 50,000 shares of Bank of New York. No rush. Get the best price possible.

Mogavero, president and CEO of Mogavero, Lee & Co., an independent broker with direct access to the trading floor, first taps a touch screen to get a chart of Bank of New York, or "BK." She accesses the NYSE's electronic trading system, known as Direct+, and unloads 1,000 shares at $30.34.

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"That gets us rolling," Mogavero says. She would have sold more. But Direct+ trades are capped at 1,099 shares every 30 seconds, so electronic trading won't take away the heart of the NYSE—its system of auctioning shares between specialists in handling particular stocks.

Pending approval from the Securities and Exchange Commission, Mogavero in about a year will be able to sell the entire 50,000-share block electronically if she so chooses.

The NYSE plans to meld electronic trading with its traditional auction system to create a hybrid market that will appeal to split-second traders as well as institutional buyers looking for the pricing stability that a market managed by specialists provides. The hybrid market is one of chief executive officer John Thain's top tasks as he tries to restructure the NYSE and ward off inroads from increasingly popular electronic trading networks such as Archipelago and Instinet's INET, which have a strong presence on the rival Nasdaq Stock Market.

On the Nasdaq, Archipelago and INET combine to move 51% of shares traded. For NYSE-listed stocks, Archipelago and INET accounted for 5.3% of shares traded in January, up from 4.4% a year ago. Another emerging player: Liquidnet, which electronically arranges block trades averaging 63,408 shares for institutional buy-side money managers, the NYSE's core market.

To make matters worse, Thain must carry out this sea change at the same time he has to revamp a board of directors left reeling by the $187.5 million pay and retirement package it granted former chairman Richard Grasso. The CEO also has to find some way to boost the value of a seat on the exchange, which has plummeted from $2.6 million in 1999 to $1 million today.

And he has to bolster the spirits—and business—of the specialists while he's at it.

Specialists don't exist in purely electronic exchanges. But the New York exchange relies on these auctioneers as the grease that keeps its gears moving. If an institution wants to sell a holding but has no customer for its stock, the specialist steps in and acts as one. Similarly, the specialist steps in if an investor wants to buy a specific stock but no seller is on the spot. Today, specialists—who know the behavior of their assigned stocks perhaps better than that of their spouses—line up trades verbally. Under the hybrid market, they can line up trades using algorithms that consider price spreads and historical data to match buyers and sellers.

What the NYSE will get is a market where electronic trading will dominate for highly liquid stocks such as General Electric. The current auction system will stay in place for less widely traded shares, to narrow price gaps such as an offer to buy at $40.50 and an offer to sell at $40.25.

But first the NYSE has to cook up the software that will let the specialists create interfaces and algorithms to make trades happen electronically and update its existing eBroker software, so traders on the floor can indicate buying interest and shares in reserve using handheld computers.

The hybrid market will be a new body on top of the Direct+ chassis. But the exchange will need systems that execute functions not currently available through Direct+. Traders, for example, will want to execute "sweeps,'' where they can swoop in and buy all the shares that have been put up for sale in a specified price range.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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