The new chief executive of the NYSE, John Thain will be sending his proposal to the rules committee of the board on Thursday of next week. Electronic trades now account for only 6% of the overall volume on the exchange. The main component of the plan is a proposed rule change to waive or reduce the 30 second waiting period now imposed on electronic trades, and to remove restrictions ( currently 1,099 shares on Direct Plus ) on the size of transactions.
NYSE Chief Mulls Trading System Change January 30, 2004: 6:23 AM EST NEW YORK - Two weeks into his tenure as chief executive of the New York Stock Exchange, John Thain is considering making a big leap into the realm of electronic trading, Friday's Wall Street Journal reported. The move would represent a significant shift for the 211-year-old Big Board, the last remaining major stock exchange that has humans on the floor handling most trading, albeit with numerous computers to assist them. It would also underscore that Mr. Thain, a former Goldman Sachs Group Inc. (GS) executive, is wasting no time shaking up the exchange. The move comes as institutional investors have become increasingly critical of the Big Board's open-auction system, saying it is slow-moving and inefficient. The Big Board's specialist firms - which oversee the buying and selling of specific NYSE shares through live auctions with brokers in a crowd - are also under investigation for alleged trading abuses that may have shortchanged investors. The proposal under consideration by Mr. Thain would be to use an electronic system to automatically match investors' stock orders that represent the best prices to buy and sell shares at a given time, according a senior specialist and other people familiar with the proposal. Such a system would enhance the floor's current trading technology, which permits the automatic execution of small stock orders but leaves the large ones to individual specialists. Mr. Fagenson and others say the plan is still in its early stages. But the change is being embraced by mutual-fund firms, some of whose representatives met in New York with the Big Board's five major specialist firms last week to air their concerns about the exchange's trading model. The group included representatives from the Investment Company Institute, the mutual-fund-industry trade group; mutual-fund firm Vanguard Group Inc. (VGI.XX); and securities firm Morgan Stanley (MWD), according to Mr. Fagenson, who attended the meeting, and others who were there. A spokesman for the NYSE had no comment. Representatives of the Investment Company Institute, Vanguard and Morgan Stanley didn't return calls. Wall Street Journal Staff Reporters Kate Kelly and Susanne Craig contributed to this article Dow Jones Newswires 01-30-04 0346ET Copyright (C) 2004 Dow Jones & Company, Inc. All Rights Reserved.
So, All they need to do is take NYSE Direct+ and do two things: 1. Make it more than 1000 shares 2. Don't let the specialists turn it off Seems like just a couple of parameters to set in the software and they're good to go. As an added bonus, have a real-time openbook. I don't know why they say that "would enhance the floor's current trading technology". The current technology is fine, just flip a few software switches - it's all there, quit crippling it. (If I'm wrong, someone tell me... like I need to ask that of THIS group) Cash
Cashonly, I believe you are correct in your assumptions. If, and I say if, this proposal has any merit, it would be a major leap towards short-circuiting the Specialist system. We need Direct+ to handle > 1099 and prohinit the Specialists from turning it off. Realtime OpenBook is a no-brainer - they need a bigger pipe for transmission. That one is totally political - they blame it on technology, but it is purely political. I like what I'm hearing from Thames, but seeing is believing. The interim chief (Reed) alluded to a lot of changes, but in the end, he buckled in favor of the Specialists once again. The payoff must have been pretty substantial.........
All of this would be fine but there is one small problem. The specialist would still need to honor their quoted prices and sizes. I believe there was once a 5,000 share direct + system(AUTX I think) but I have no idea what happened to it. Institutional direct is a decent system but you have to wait 30 seconds while orders are processed(Front runned by others) and min size was 25,000 shares but it might have been changed recently. The biggest problem they have the lack of a "Firm" quote. they have no set "NBBO", they can use their "Liquidity quote" or go with the published quote, these 2 can be up to 2 points apart depending on the price of the stock. The openbook gets played by the specialist, especially when there is news or the stock really gets moving, I'm not to sure how much better a realtime quote would be but I'd still like to see it. I'm not sure how these changes would really be helpful but I would like to see them so at least there has been a change that wasn't 100% in favor of the specialists.
I watched some NYSE stock during a meltdown a few years back. The ECN's were front running the specialist something fierce and there was nothing he could do about it. Eventually, he just pulled the plug and stopped the trading in that security for a while. If they actually implement this proposal I think the specialists would get creamed -- so I would expect some trick to maintain the status quo.
This may be on another topic - but the over five minute rule by which the specialist gets an extra commussion needs to go
How much is the Open Book actually delayed? I trade 99% of the time on the Naz because of issues just like the ones mentioned here. I'm just not comfortable with the control the specialist has over the stock. If I see a posted price I want to be able to hit it ( or at least have a chance), and there just doesn't seem to be enough ECN liquidity on most stocks. I find the spreads get pretty scary at times too.