In a historic move that would likely erode the two-century dominance of its open-outcry auction system, the New York Stock Exchange said Monday it plans to scrap many limits on electronic trading and expand computer-driven orders.
The proposal would create a “hybrid market” that would still include the traditional system of floor traders who manually handle orders but would increase the use of the exchange’s electronic trading platform, called NYSE Direct, the exchange said.
Under the plan, the exchange would eliminate many of the limits on the size, timing and types of orders that could be placed through NYSE Direct, the exchange’s chief executive, John Thain, said at a news conference.
“This proposal will hopefully allow us to increase our volume here, increase our market share, which will ultimately benefit the brokers,” Thain told reporters.
Monday’s proposal, which would have to be approved by the U.S. Securities and Exchange Commission, has been months in the making. Institutional investors have been demanding greater transaction speed, in addition to the NYSE strengths of pricing and deep liquidity.
Trading practices at the 212-year-old Big Board have been under scrutiny since last year in the wake of a trading scandal involving the market makers on the floor of the exchange, who are known as “specialists.” More recently, proposed reforms to the structure of the U.S. stock markets have placed a spotlight on the way the Big Board handles trades.
Thain said one of the key elements of the proposal is to allow specialists to work electronically. “I don’t think it will disadvantage them in terms of their ability to make a living,” he said in a news conference Monday.
Thain's ambitious plan
If adopted, the changes will be among NYSE CEO John Thain's most ambitious moves since taking over at the helm of the institution last January.
The NYSE’s specialist system is one of the last bastions of the manual auction place in the world of stock trading, said John Wheeler, vice president of domestic equity trading at American Century Investments. “We are going to welcome any automation or expansion of electronic trading that the NYSE proposes,” he said.
Trading on an electronic platform could eliminate layers of traders and save American Century, one of the biggest U.S. mutual fund companies, between $200 million and $250 million a year in costs, he said. American Century trades about four billion shares a year, worth about $100 billion.
“You are starting to see, slowly and gradually, efforts to make things more efficient,” said Donald Yacktman, president of Yacktman Asset Management. “It’s a recognition they need to do something different. You do not want to price yourself out of the market.”
Bill Cline, a managing partner for global capital markets at Accenture, a consulting firm, said the NYSE’s announcement Monday went further than an earlier proposal and is clearly designed to appease institutional investors.
“I think this is a very significant step forward for the NYSE and it really makes evident Mr. Thain’s leadership — he has been responsive to the investor community, and he has done a good job of bringing along his internal system of specialists and floor brokers,” Cline said.
Specialist system in focus
Cline said it remains to be seen if the NYSE's latest plan will signal the end of the exchange's floor-trading community of brokers and specialists.
“This would be the most important market structure change in the history of the NYSE, but I don’t know if it portends the end of open outcry trading,” he said.
“It shines a spotlight on the practice and the challenge for the exchange now is to blend the value that the open outcry system can provide to efficient liquid markets with the abilities of a much more electronic market,” Cline added. “If the NYSE can do this they will occupy a unique position in the world’s financial trading system.”
One potential benefit for the NYSE could be the growth of its electronic trading system at the expense of its rivals Cline added. The current NYSE Direct Plus system accounts for about 10 percent of the exchange's trading volume.
“This move erodes some of Nasdaq market’s value proposition,” Cline said. “I would speculate that the NYSE’s share of electronic trading volume will rise from 10 percent, and I think this will set the stage for growth because in general this was a response to the concerns that the NYSE and everyone else in the industry knew were rampant among institutional investors.”