Floor Traders Clash With NYSE

Discussion in 'Wall St. News' started by guru, Jul 14, 2019.

  1. guru

    guru

    https://www.wsj.com/articles/floor-traders-clash-with-nyse-11563010201
    Disciplinary push is meant to protect opening and closing auctions, where floor-trader errors can have far-reaching consequences

    By Alexander Osipovich

    July 13, 2019 5:30 am ET

    Floor traders on the New York Stock Exchange, who once numbered in the thousands, have been pushed to the brink of extinction by the rise of electronic trading. Now, some feel they have a new nemesis: the NYSE itself.

    The Big Board publicly celebrates the floor, one of the world’s last working stock-exchange trading floors and an essential part of the NYSE’s brand. Behind the scenes, conflict has broken out over a crackdown on floor traders that some say has driven smaller firms out of business.



    Current and former floor traders said the exchange’s in-house regulatory arm since 2017 has ramped up enforcement of a federal rule designed to prevent trading errors. That occurred in the wake of a bungled trade that caused one brokerage to fail.

    “The exchange was very aggressive about pursuing even the smallest violation,” said Peter Costa, former president of Empire Executions Inc., a floor brokerage that closed last year.

    That appears to have accelerated a winnowing of floor-trading businesses, which are already struggling to stay afloat in today’s high-tech markets. Since August 2017, 15 NYSE floor firms have closed, folded into larger brokerages or left the floor, according to data from the Financial Industry Regulatory Authority. Around 35 firms are active on the floor today, down from hundreds in the 1990s.


    During a town-hall meeting in the exchange’s iconic Board Room last September, floor traders voiced frustrations over the crackdown with executives, according to people who attended. Among the complaints: the NYSE was punishing floor brokers for violating the federal rule, but offering only vague guidelines on how to comply with it.

    Behind the disciplinary push is the NYSE’s desire to protect its critical opening and closing auctions, according to people familiar with the exchange’s thinking. Held at 9:30 a.m. and 4:00 p.m., the daily auctions determine official start- and end-of-day prices for thousands of NYSE-listed stocks. Those in turn determine the value of index funds owned by millions of U.S. investors.


    NYSE rules grant floor brokers special perks for trading at the open and the close. So even small firms on the floor can send tens of billions of dollars of orders to buy or sell stocks into the auctions on a single day. That has helped keep NYSE floor traders in business—but it means their errors can impact investors who rely on the exchange’s opening and closing prices.

    The auctions are lucrative for the NYSE, which is owned by Intercontinental Exchange Inc. Last year, the NYSE made $149 million from fees for trading at the open and close—or more than half its revenues from stocks trading, according to Equity Research Desk, a research firm.


    “The NYSE’s trading floor, where human judgment is integrated with cutting-edge technology, is a key part of our client offering,” said a NYSE spokesman. “The enforcement of exchange rules and applicable regulations plays a critical role in protecting investors and maintaining our long track record of fair and orderly trading.”

    The rule at the center of the dispute, the Market Access Rule, requires brokers to set “reasonably designed” credit limits for clients and cut them off if the clients’ trading exceeds the limits. In a series of cases, the NYSE accused some floor brokers of setting the limits so high they were largely useless, according to settlements posted on NYSE’s website.


    One floor brokerage, Prime Executions Inc., mistakenly set one client’s credit limit at $50 billion when it had intended to set it at $1 billion, NYSE alleged in a settlement from April. Prime didn’t admit or deny wrongdoing. The law firm representing Prime declined to comment.

    An incident on Aug. 11, 2017, triggered the clampdown, traders said. That day, Daniel LePorin, president of the floor brokerage G&L Partners Inc., inadvertently sent a large number of one client’s orders into the opening auction, causing “millions of dollars of unintended executions,” according to a settlement that he and G&L later reached with the NYSE. The exchange accused Mr. LePorin of failing to set a reasonable credit limit, allowing the error to happen. G&L went out of business soon afterward. Mr. LePorin and two former lawyers for G&L didn’t respond to requests for comment.

    Despite calm markets that day, 100 NYSE-listed stocks fell 3% or more at the open, more than any other day in 2017, according to an analysis by data firm MayStreet. Many stocks fell sharply at 9:30, then rebounded within minutes, a sign that their opening prices were likely distorted by the error.

    The incident escaped public attention. But NYSE officials saw it as a close call, which would have been worse if an exchange employee hadn’t canceled many of Mr. LePorin’s orders at the last minute, according to the people familiar with the NYSE’s thinking.

    From 2010, when the Securities and Exchange Commission adopted the Market Access Rule, until the G&L incident, only three NYSE floor brokerages were penalized for breaking it. Since last year, eight have been fined for such violations.


    Though the fines are tiny by Wall Street standards—ranging from $10,000 to $100,000—they and legal fees were weighty for smaller floor traders. Some closed as a result, traders said.

    The NYSE declined to comment on the impact of its disciplinary push.
     
    murray t turtle likes this.