Hank gives the specialists hell!

Discussion in 'Order Execution' started by Tea, Dec 18, 2003.

  1. Tea


    Here is a WSJ commentary from Hank Greenberg, Chairman of AIG. You've got to love this guy! He can't help but to tell the truth. Give them hell Hank! :)


    Lose the Specialists


    No matter what the outcome of the Calpers suit against the Big Board and seven specialist firms, reform is coming to the New York Stock Exchange. As John Reed works to restore investor confidence, rout out illegal trading practices and bring an end to potential conflicts of interest, he will have to address a more fundamental issue. Under the current rules, NYSE specialists have been granted a virtual monopoly, and monopoly powers are inherently at odds with the functioning of a fair and efficient market.

    The specialists have exploited two vehicles granting them privileges and opportunities not shared with others. These benefits enable them to reap vast profits at the expense of investors.

    The first is the "trade-through" rule, which says that a trade must be executed where the best price is quoted and provides the specialist with a free option for 30 seconds. The best-price rule sounds good in theory. Yet in practice it gives the specialist a monopoly by forcing other marketplaces to use the slower specialist-based system that might quote a better price, but not necessarily deliver it. The rule makes no sense in the world of electronic trading, where 30 seconds is an eternity that effectively freezes the market and gives the specialist enough time to arbitrage against the investor's position.

    The trade-through rule was mandated by the SEC some 25 years ago, before the creation of fully electronic markets, to ensure that investors' orders are executed fairly. At that time, the physical limitations of floor-based trading could have had an adverse impact on the transparency and fairness of prices. Today, in a high-speed electronic trading environment, the trade-through rule has the exact opposite effect.

    Specialists would have you believe that without their intervention and the enforcement of the trade-through rule, there would be great chaos and wide spreads in the trading of listed stocks. In fact, the success of other electronic markets in the U.S. and elsewhere refutes that argument. The specialists are simply trying to protect their monopoly at investors' expense.

    The second area that must be scrutinized is the designated order turnaround, or "DOT," system, which now accounts for 98% of NYSE customer orders delivered to the floor. Although it uses electronic technology, DOT is structured, in typical monopoly fashion, so that the buyer and seller must go through the ever-present middleman -- the specialist. Opportunities for abuse abound. Under DOT, the specialist positions himself as a gatekeeper who has an unfair view of the direction in which bid and ask traffic is flowing and is likely to flow. He can trade accordingly. He can run up a price in advance of a large buy order, which he can then execute at an even higher price with the shares he has acquired. Investigations have revealed that specialists had delayed DOT orders from reaching the floor and being executed. During the delay, the specialists were trading ahead of customers.

    The NYSE should eliminate the specialist from the DOT equation. A fair and efficient electronic trading system would match directly buyers and sellers of listed companies. Electronic markets could then compete on a level playing field with the NYSE, which would improve pricing and deepen liquidity for listed stocks. This is what happened when Nasdaq-listed equities began trading in competing electronic markets.

    If the specialist system is to be salvaged, dismantling the processes and procedures that give specialists monopoly powers is essential. If the specialists have a role, as originally intended, in maintaining efficient and orderly markets, then it will have to be played under a set of rules that does not disadvantage investors.

    I have long been concerned that NYSE specialists lack the capital to maintain orderly markets in large capitalization stocks, and that lack of proper surveillance and internal compliance programs leave the specialist system wide open to conflicts and abuse. Probes have confirmed these problems to an alarming extent. The $155 million of trading abuses that have been uncovered represent money taken out of investors' pockets. Any fines levied should serve as a deterrent as well as restitution.

    Clearly, reforming the system will require more than simply better oversight and discipline. The specialists' monopoly powers are an anachronism that pose a significant obstacle to an efficient and fair market.

    Mr. Greenberg is chairman of the American International Group.
  2. Cutten


    Hear hear. Quite why US investors put up with the corrupt rip-off practises at the NYSE and NASDAQ is beyond me. You would expect this kind of thing on the Bombay or Karachi stock exchanges, not in the most liquid equity markets in the world. These institutions are a disgrace to the free enterprise system.
  3. This is why I went to Futures 3 years ago....

    Michael B.

  4. did anyone read the complaint calpers filed? would make for a very interesting jury trial.
  5. Tea


    Hank rules!!!
  6. $4 million to another insider... i bet he's going to really crack the whip.