specialist article

Discussion in 'Trading' started by larrylivingston, May 30, 2003.

  1. does anyone have a link to the article in the wall street journal yesterday about specialists??? thank you
  2. mskl



    For months, Jeff Tabak stewed when he felt he wasn't getting good trade-completions, or "executions," while trading on the New York Stock Exchange. But one trade in December for a client who is a large money manager pushed him too far.

    Mr. Tabak, a partner in New York brokerage firm Miller Tabak & Co., is convinced that a NYSE-floor specialist -- one of the traders who match buyers and sellers on the floor -- made a quick profit by overcharging him for 50,000 shares of Georgia-Pacific Corp. "Needless to say, I went berserk," says Mr. Tabak, whose firm filed a formal complaint about the incident.

    Institutional investors and their brokers, some of the NYSE's biggest customers, are cranky these days. Along with a difficult stock market, some institutional investors complain that they are getting taken advantage of when they trade large blocks of shares on the Big Board. Much of their anger focuses on specialists, the heart of the two-century-old market.

    For its part, the exchange says the vast majority of institutional investors are treated fairly. Edward Kwalwasser, the NYSE's top regulatory executive, says only about 30 money managers a year complain via a special hotline set up a decade ago that goes to exchange officials. Of those, he says the exchange finds that about 10% to 15% are mistreated in some way.


    See complete coverage of the investigations into Big Board specialist firms.

    But Mr. Kwalwasser and other officials say they believe many big investors don't complain to regulatory officials for fear of damaging Wall Street relationships. At the beginning of the year, the exchange opened up a new hotline for the largest 100 or so institutions that will route complaints to specialist firms in the hopes that more professionals will come forward. The Big Board says it has received 21 complaints so far. The number of complaints represent a small proportion of the NYSE's daily trading volume of about 1.4 billion shares.

    "We've heard the same things -- that institutions are unhappy," Mr. Kwalwasser says. "We want to make sure everyone's happy and, if they're unhappy, find out what they're unhappy about."

    Specialists direct the NYSE's auction-market system, and, whenever possible they are supposed to get out of the way and let the market work on its own. Specialists are permitted to trade for their firm's accounts to correct imbalances between buyers and sellers.

    The exchange, along with the Securities and Exchange Commission, is investigating whether some specialists have unnecessarily stepped between buyers and sellers to make improper trading profits. The Big Board is examining trades in about two dozen stocks, including General Electric Co., according to people familiar with the matter. Some investors wonder whether there is a red flag in the exchange's own data: Specialists' participation in trades has risen in recent years, to about 14.9% of volume at year-end 2002 from 8.6% in 1995.

    Despite institutional investor complaints, rivals haven't yet done much to dislodge the NYSE's dominance. In 2002, the exchange reported an 82% share of trading volume in NYSE-listed stocks, a level that has held relatively steady for years -- though its market share fell from 84% in 2001. By contrast, amid fierce competition from electronic exchanges, SuperMontage, Nasdaq's main trading system, has 18% market share of trading volume in its own stocks, down from 31% on predecessor systems at the beginning of 2002.

    In the case of Miller Tabak, the firm first complained in a letter to New York Stock Exchange regulators in January. The NYSE regulatory division initially told the firm it found nothing improper with the Georgia-Pacific trade. Frustrated, the firm filed an arbitration complaint with the Big Board in early May against the specialist, John Burke, and his employer, Fleet Specialist Inc., the FleetBoston Financial Corp. unit.

    This month, in an indication of how seriously the exchange is taking complaints, NYSE Chairman Dick Grasso called Mr. Tabak personally to ask him to suspend the arbitration while the exchange took another look. Miller Tabak initially agreed to the request, but in late May the firm reinstated its arbitration filing.

    According to exchange records, shortly before the close of trading on Dec. 20, 2002, Miller Tabak sought to buy 50,000 shares of George-Pacific at a time when public data showed offers to sell outnumbered offers to purchase by 366,200 shares, hinting at downward pressure on the stock. Miller Tabak ended up paying $16.40 apiece for the shares, including about 30,000 from Fleet's account. Less than 30 seconds later, at the market close, investors were buying shares for $15.90 apiece.

    Through a spokesman, Mr. Burke declined to comment, as did Fleet. Mr. Kwalwasser says Fleet Specialist violated no rules because Miller Tabak used a market order -- which specifies a purchase at prevailing prices -- and there was a lack of sellers at the precise moment the specialist executed the trade for his own account.

    But Mr. Grasso reopened the investigation because the trade could have been a breach of broader rules regarding "fair and equitable principles of trade," Mr. Kwalwasser says. That is because the customer would have been better off if the specialist had waited to execute the trade at the close, he says.

    "It was a lousy business decision -- one we may be able to do something about," Mr. Kwalwasser says of the specialist's trade.

    Concern about specialists has intensified since January 2001, when all NYSE-listed shares started trading in increments of only a penny, instead of one-sixteenth of a dollar, or 6.25 cents. The move to decimals has, as intended, lowered transaction costs by narrowing the spreads on stocks, or the difference between the best price bid for stock and the best price offered to sell it.

    But many institutions say trading in penny increments means less ability to do block trades quickly at a single price -- since there are many more price points where bids and offers can be placed. The size of the average trade on the NYSE was 666 shares last year, down from 2,303 in 1988.

    Robert Murphy, chief executive of specialist LaBranche & Co. Inc. and an exchange vice chairman, said many institutional investors are blaming specialists for trades that aren't their fault. In many cases, he says, fast-trading investment firms, such as hedge funds, use computer strategies that monitor block trades and place orders within pennies of their prices as soon as they are reported by the exchange. "It's the institutions doing it to themselves," Mr. Murphy says.

    Institutional investors note that concern about "penny jumping" isn't restricted to NYSE. On Nasdaq, some free-wheeling traders also try to jump ahead of the big money. But, unlike on the Big Board, where one specialist controls each stock, Nasdaq is a decentralized system, featuring a variety of brokerage firms that make markets in Nasdaq stocks. So institutions feel they can shop around for trusted middlemen, and they don't have one focus for their anger.

    "It's not just an NYSE issue," says Andrew Brooks, head of equity trading at mutual-fund firm T. Rowe Price Group Inc. in Baltimore. "The specialist is just a convenient target."

    In an SEC-sponsored forum last November, Scott DeSano, head of global-equity trading at Fidelity Investments, the nation's largest mutual-fund firm, said fear of being "pennied" by specialists and other traders now deters the company from using limit orders -- requests to buy or sell a stock at a set price -- on the NYSE. Instead, Mr. DeSano said Fidelity now trades predominantly by parceling its orders out to big brokerage firms. Mr. DeSano said Fidelity was also using electronic-communications networks, which trade stocks without human intervention.

    Often, the sums can add up to more than just pennies on a trade. David Briggs, head of global-equity trading with Federated Investors in Pittsburgh, recalls a complaint he made late last year about a trade in a big stock in the Standard & Poor's 500-stock index. Through a broker, he indicated that he wanted to sell 49,400 shares of a stock if it fell below $65. He says the specialist bought the shares for $64.50, after which the stock price almost immediately shot back up to $65.

    "I felt like my shareholders had just been ripped off for $25,000," he said. After he complained, Mr. Briggs says the specialist offered him the shares at $64.75 as a compromise. "Let's just say it left a bad taste in my mouth," adds Mr. Briggs, who declined to identify the stock or the specialist. Mr. Briggs says he accepted the offer and didn't pursue a complaint with the exchange.
  3. mskl


    Concern about human intervention has led some institutions to try entirely new methods. This month, when Daniel McManus, director of equity trading at Turner Investment Partners in Berwyn, Pa., wanted to buy 1.35 million shares of Home Depot Corp., he turned to a two-year-old start-up, called Liquidnet Inc. -- a kind of online-dating service for money managers that links institutions directly by computer, seeking to match big trades. The two sides simply negotiated a price -- anonymously.

    For now, only seven million NYSE-listed shares trade each day on Liquidnet, hardly a huge threat considering the Big Board's daily volume of 1.4 billion shares.

    Still, in a nod to institutions, the NYSE in June is expected to introduce a new system, called LiquidityQuote, which will give separate prices for large blocks of shares.

    Sang Lee, manager of securities and investments at Celent Communications, a financial-services research firm in Boston, says the exchange knows it must address institutions' concerns because its "brand name is at stake."

    Of Liquidnet and other services, Mr. Lee says: "If big investors thought they were being treated fairly, these businesses wouldn't have a chance."
  4. thanx
  5. Kap


    Isn't it time u went to electronic matching trade to trade like us over here in europe?, cuts out all the middlemen that screw you when your an off the floor screen trader, but hang on the floor traders own the exchange over there so its not in there interest to! - wakey wakey
  6. nitro


    When I read this in the Journal yesterday, I was note sure what to think of it. There are already ways that big buyers and sellers can meet outside the NYSE when doing large blocks. Why is this being touted as some "new" way to bring buyers and sellers together? It just seems like a ploy of the NYSE to draw attention to itself to take business away from other players.

    Remember the massive DIS trade that occured a while back on 125M shares? You think that was worked at the NYSE floor by the specialist?

  7. its obvious what's going on, they aren't making enough money with .01 spreads and .01 price increments, and there isn't enough liquidity at each price point.

    obviously the benefits of this scheme are being caught up with by the downside.

    -less liquidity at all price points
    -much less likely to get a limit order filled
    -more corruption on the trading floor
    -more and more trading being done off floor

    "Concern about specialists has intensified since January 2001, when all NYSE-listed shares started trading in increments of only a penny, instead of one-sixteenth of a dollar, or 6.25 cents."

    if they had gone to .05 spreads and .05 price increments there would be nothing to scream about and we would still be in decimal land.
  8. the price increments and spreads shrank way to fast in relationship to the trading volume, and the result is that we have less orderly markets than we did in the 90's, and that is a bad thing for everybody.
  9. Lot's of computerized auto-trading going on. you can see it in the price action.
  10. very true, makes everything "jittery", jumping pennies here and there.

    makes intraday charts, and precise support/resistance levels ( down to the minimum tick ) less reliable.
    #10     May 30, 2003