NYSE Hegemon

Discussion in 'Order Execution' started by Tea, Jun 24, 2003.

  1. Tea


    Here is a partial quote from a guest editorial in today's Wall Street Journal. Its written by Meyer Frucher Chairman and CEO of the Philadelphia Stock Exchange. He states his case that traders get quicker fills, tighter spreads and lower transaction costs on NYSE stocks using regional stock exchanges.


    "...........Although five regional exchanges make markets in NYSE-listed stocks, the Big Board's share of these equity trades regularly exceeds 80%. This kind of hegemony is unhealthy for the NYSE and investors alike.

    * * *
    We regional stock exchanges -- the Philadelphia, Chicago, Pacific, Boston and Cincinnati Stock Exchanges -- represent the last scrappy remnant of more than 100 local exchanges that flourished a century ago, before the advent of cheap long-distance phone rates. We've survived by reinventing ourselves, embracing cutting-edge technology and occasionally giving the NYSE a much-needed kick in the pants. Revolutionary concepts such as the first securities clearing house, the first computers, continuous net settlement of trades and automated execution of small orders all originated on the regionals. In each case, the NYSE followed our lead.

    Watch out for the little guys

    And we're still breaking new ground. Where the NYSE remains wedded to its system of granting exclusive franchises to specialists, the regionals use an electronic system of remote competing specialists, so that many stocks have three or four specialists vying to offer the best price. The regionals' aggressive automated price improvement tools track quotes even beyond the National Best Bid and Offer.

    To be sure, size-wise we regionals are to the Big Board what Apple's Mac operating systems are to Microsoft's Windows. Like Apple, we grow by appealing to niche customers -- those who value quality trade executions. These investors understand that, while the Big Board may be the best place to unload large blocks of stock, an ordinary investor trading fewer than 2,000 shares will often get better execution -- in terms of speed and price alike -- on the regionals.

    Much of the difference lies in the regionals' perception that computers are faster, smarter, more efficient and more honest than humans. Where it takes an average 17 seconds for a human specialist to execute a trade on the NYSE's SuperDot electronic order routing system, it typically takes three to seven seconds on the regionals. This is no small consideration: In an automated age, markets can shift dramatically in the time it takes the NYSE to process an order.

    Over a recent three-month period, the Big Board's effective bid-ask spread on market orders of 100 to 499 shares was 2.77 cents, compared to 1.99 on the Chicago, 1.77 at Philadelphia and 1.47 at Boston. Transaction costs are lower on the regionals, too. To attract orders to our automated execution system, for example, the Philadelphia Exchange waives transaction costs altogether.

    These and similar statistical analyses on all types of trades, once the subject of idle speculation, are now widely available through disclosures mandated by the SEC's Rule 11Ac1-5. A click on your mouse will reveal, for example, that more than 25% of the trading activity in blue-chips like General Electric and IBM takes place away from the Big Board -- which suggests that some brokers, at least, know where to search for a better deal.

    So why don't more brokers direct orders to the regionals? Most likely because they feel little pressure to do so from their customers, who see only the commission charge on each trade.

    As the head of one brokerage firm told me, "The Big Board is safe. You can't be criticized for sending business there."

    I hear him, but I respectfully disagree. A generation ago, many department stores encouraged the demise of local newspaper competition in the belief that advertising in a single paper would make their lives easier. Only later did it dawn on them that, by placing themselves at the mercy of a monopoly, they had surrendered their bargaining power.

    * * *
    So here's my admittedly self-serving pitch to investors: Ask your broker if he searches beyond the NYSE for the best price and execution. By helping us to compete, you'll help keep the Big Board on its toes. You'll help expose the true prices of stocks. You'll help raise the general level of investor confidence.

    All it takes to reform the Big Board is investors' intelligent pursuit of their own self-interest."
  2. i wish ib had the ability to hit regional exchanges. wonder why they dont? it must not be that easy or ib would do it.
  3. it may have something to do with their NYSE index arb operations...
  4. alanm



    As I understand it, in the past, the connections to the regionals have been slow, problematic, and relatively expensive. Considering the limited about of business that would get done over them, I can understand not wanting to add them.

    OTOH, things may have improved, with the regionals trying to be more competitive. Might be worth asking again.