NYSE nipping at their heels

Discussion in 'Order Execution' started by Tea, Dec 29, 2002.

  1. Tea


    Here is a partial quote from an article in the NYT. Comment: the more piggish the specialists get in exploiting their near monopoly, the more competition they will invite.

    Electronic Trading Networks Look Toward the Big Board

    By cutting costs and promising speedy execution of orders, electronic communications networks have captured roughly 70 percent of the trading in Nasdaq stocks. Now Instinet and Archipelago, the two biggest E.C.N.'s, have set their sights on the New York Stock Exchange.

    "Our customers are telling us that they want us to build up the listed side of our business," said Andrew Goldman, an executive vice president at Instinet. They want "a robust alternative to the New York Stock Exchange," Mr. Goldman said, meaning one with enough liquidity to instantly match the bids and offers in their systems.

    But the networks may find the New York Stock Exchange a much tougher competitor, largely because more than 80 percent of trading in Big Board stocks takes place on the floor of the exchange, where a specialist handles each listed stock. By contrast, in the over-the-counter market, many market makers buy and sell shares electronically, and no one person or firm is responsible for maintaining orderly trading in a single security.

    Robert McSweeney, a senior vice president of the exchange, in charge of competitive positions, said that E.C.N.'s cannot replicate the unique dynamic of floor trading at the Big Board.

    "Specialists dampen volatility," he said, "by trading against the prevailing trend." Specialists trade between the best bids and offers so both sides get a better price, according to Mr. McSweeney. Comment: specialists dampen volatility by delaying order execution and by halting trading in certain stocks. Specialist trade between the best bids and offers NOT so both sides get a better price, but rather so they can line their pockets. Nasdaq lets the retail customer trade between the best bid and offer (i.e. splitting the spread).

    Networks wishing to compete with the New York Stock Exchange also face technical obstacles, analysts say. The Intermarket Trading System — a computer network that connects the New York Stock Exchange with other United States markets — is creaky and prone to glitches, said Octavio Marenzi, managing director at Celent Communications, a consultant group based in Boston. If more transactions took place off the New York Stock Exchange trading floor, "it would put a tremendous strain on the Intermarket Trading System," he said.

    Both Instinet and Archipelago already execute some trades for stocks listed on the Big Board, but they have so little market share that in order to complete trades, most of these orders are routed to the New York Stock Exchange, Mr. Marenzi said. Instinet traded about 4 percent of the exchange's listings this year, compared with 1.5 percent for Archipelago, according to Mr. Marenzi.

    While individual investors can check with their brokers to find out where their orders are completed, individuals cannot direct their trades to a specific market. But investors have generally benefited from greater competition in over-the-counter trading, industry experts say.

    The cost of trading has declined, and investors have also benefited from a narrowing of spreads — the difference between the buying and selling prices of stocks.

    Despite the obstacles, the electronic networks are still angling for more Big Board listings, largely because they need to move beyond Nasdaq stocks like Intel and Microsoft if they want to continue their rapid business expansion, executives say. And trade in stocks listed on the New York Stock Exchange, like Citigroup and General Electric, is just too tempting.

    "We're all pretty hungry to expand the volume of our business," said Jerry Putnam, the chief executive of Archipelago.

    The Nasdaq market executed 31 percent of trades in Nasdaq stocks, compared with 26 percent for Instinet and 10 percent for Archipelago, this year through Sept. 30, the most recent reliable data, according to Celent. The remaining one-third of trading occurs on smaller E.C.N.'s, regional exchanges or through internal order matching by broker-dealers.

    (for the full article read the New York Times)
  2. this is truly the dumbest article i've read in 3-4 days...

    "octavio" needs to wake up and smell his upper lip...because ARCA is the buggiest piece of crap out there, and the intermarket system is not "creaky"

    i bet octavio's parents named him that because they hated him and wanted him to get beat up alot...:D heh

    the comment about customers not being able to route their orders where they want was especially uninformed...(unless you use TD waterhouse or one of those other obsolete brokers...)
  3. Tea


    Another discrepancy I noticed:

    "The specialist usually only accounts for 20% of the volume"
    -- RTharp

    "But the networks may find the New York Stock Exchange a much tougher competitor, largely because more than 80 percent of trading in Big Board stocks takes place on the floor of the exchange, where a specialist handles each listed stock."
    -- New York Times
  4. The volume of that the floor handles is over 80% and is routed to NY yes Tea that's right.

    The Specialist only takes about 20% of the other side of those orders that 80% of the floor takes . Not 100%.


    Take a look at the top line as it scrolls across

    Program trading accounts for 31.7% of NYSE volume.

    Each time a stock ticks up the specialist isn't buying if he is participating. He might be shorting though. As he must be opposing order flow.

    Every down tick he isn't shorting as he has to be opposing order flow. He might be buying though.

    He can't trade the Micro Picture on each trade. Somebody else has to.
  5. WarEagle

    WarEagle Moderator

    I think Tharp means that 20% of the trading volume is traded by the specialist from his own inventory...the other 60% can still be traded on the floor between other parties.

    Edit: Oops, Robert beat me to it while I was typing...
  6. Tea


    The discrepancy has been absolved
  7. From Robert and WarEagles' comments can we infer that most people use limit orders? If only 20% of volume is done by the specialist then is it fair to say that most people aren't using market orders? A market order would get filled from the specialist's inventory, right?
  8. competition is what's in order. i hope the viable competitors last long enough to make an impact.

    funny to think that listed prop firms might soon be offering liquidity rebates.
  9. WarEagle

    WarEagle Moderator


    Only one side would need to be a limit order. If I have a limit to buy on the bid and someone enters a market order to sell, then our orders get matched. Also, if two market orders come in at close to the same time, they could be matched somewhere between the bid and offer. There are several ways it could happen without the specialist taking one side.
  10. market orders are constantly bunched with other orders and than matched with opposing orders. The specialist doesn't always participate with Market orders either.
    #10     Dec 30, 2002