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NYSE mulls move into derivatives trading

The New York Stock Exchange intends to expand its product range, including a possible move into derivatives trading, as part of a broad review to boost revenues and growth.
/ Source: Financial Times

The New York Stock Exchange intends to expand its product range, including a possible move into derivatives trading, as part of a broad review to boost revenues and growth.

John Thain, NYSE chief executive, said in an interview with the FT that he expected to finalize plans within the next six to 12 months. He also hopes within the next year to address the NYSE's ownership structure, including the option of turning it into a for-profit public company. 

The ambitious timetable for remodelling the world's biggest stock exchange underscores Mr Thain's determination to move beyond the controversy over the $187.5 million compensation package awarded to Richard Grasso, his predecessor. 

"I don't want to lose market share even if it's only a couple of percentage points," Mr. Thain said. "A gradual erosion of market share . . . will be a problem eventually." 

A move by the NYSE into derivatives trading would pose a direct challenge to Chicago exchanges, the dominant players in the U.S. market, which are already threatened by the entry of Eurex, the German-Swiss futures exchange. 

Mr. Thain said it was not obvious why the NYSE had not considered a move into derivatives in the past to complement its predominance in equities trading. 

He made clear his first priority remained to restore investors' confidence and trust in the exchange as the best place to trade shares. 

The NYSE has already introduced significant reforms such as splitting regulatory functions from the commercial side, slimming down a bloated board and splitting the role of chairman and chief executive. 

One of Mr. Thain's next steps, he said, would be to examine the compensation model for specialist traders. "We have to come to a better definition of what specialists are doing a good job. What does it mean to be a good specialist?" 

The NYSE and the Securities and Exchange Commission, the chief U.S. financial regulator, this week finalised a $241.8m settlement dealing with accusations that specialists took advantage of their position to trade ahead of investors and interfere with trades. 

One option favoured by some people in the NYSE is to introduce commissions on individual trades for specialists. Under the present system, the NYSE's critics argue that specialists have an incentive to cheat investors because they can trade for their own accounts. 

Mr. Thain said he had not made up his mind about how best to compensate specialists. But he made clear they would continue to play an important role at the NYSE, notably because they could provide liquidity at times of volatility caused by unexpected events such as takeover bids and earnings surprises. 

Mr. Thain also said that he was "comfortable" he could meet demands by some institutional investors, notably Fidelity, for electronic execution of their trades at the NYSE. 

These critics, which he described as "a small but vocal minority", have pressed for electronic access because they prefer speed to obtaining the best price. 

The NYSE says it offers the best price 93 per cent of the time but critics counter that slow speed of execution at the NYSE undermines the price advantage, compared with electronic rivals such as Nasdaq and Archipelago.