What is the most efficient way to trade stocks? There are partisans on all sides.
“The greatest pricing efficiency is on the New York Stock Exchange,” and its people-centric trading system, said NYSE co-Chief Operating Officer Bob Britz.
Electronic competitors beg to differ.
“We have a better solution to the slow markets of the New York Stock Exchange,” Instinet’s Ed Nicoll said. “Speed gets you more efficient and better prices.”
Everyone who trades stocks wants the same thing: They want as many people as possible to see their order to buy or sell stock. Why? It ensures they — and you — will be able to get the best price for the stock they have, hopefully in the shortest time. The difference in opinion comes in how to execute the order.
Those who favor the NYSE and its specialist system say the exchange has the deepest pool of liquidity — the most stock available to trade at any one time — which gets the best price the vast majority of the time.
They also say specialists step in to stabilize the market if there is an imbalance of buy and sell orders.
Those who favor electronic trading say they don’t need to have specialists intervene in the trading.
They say electronic trading is faster and easier to access, and they say it provides more anonymity than trading on the NYSE floor.
So who’s right?
Years ago, European markets made the switch to an all-electronic format, most famously the London Stock Exchange with its so-called “Big Bang” in 1986.
Indeed, the NYSE is alone today among the world’s major stock exchanges with a physical trading floor where humans interact face to face..
“I’ve never heard about anyone in Europe talking about going back to a trading floor,” says Norman Poser, a professor at Brooklyn Law School.
But floor-based systems have supporters.
Howard Siegel has traded S&P 500 futures for over 20 years on the floor of the Chicago Mercantile Exchange. Today he also trades the same product electronically, but says he returns to the floor to trade because he can often get better prices and a better sense of the mindset of the market.
“What the pit offers is a body language and a rhythm that takes place that I’m able to integrate with my understanding of the markets,” Siegel said. “I know if Merrill Lynch is buying or selling, [or] what Goldman is doing.”
The potential advantage Siegel is talking about has been a source of criticism for years — that there is not a level playing field for everyone because traders like Siegel at the MERC, or specialists and floor brokers at the NYSE, can get a better understanding of the market than others.
It’s an issue the Securities and Exchange Commission is now studying.
“We’ve got to make sure there is a fair and level trading platform, and we’ve got to worry about the kind of advantages for traders that have taken place,” SEC Commissioner Harvey Goldschmid said.
Buy why should fair and level matter to the investing public?
“There’s money in it for the public — they get better trades, fairer trades, cheaper trades if the system works,” Goldschmid says.
So which system is better? If there is a level playing field, it’s the one the public prefers.
“Ultimately, people will vote with their feet, where the order flow is given, where the liquidity goes, that’s the winner,” says says Jarrett Lilien, E*Trade’s chief operating officer. “That’s the best exchange, that’s the best method of getting trades done.”
The SEC’s Goldschmid says you can expect some proposals on market structure from the agency in a matter of months.