05/02/2004 16:59
New York Stock Exchange chief executive John A. Thain will formally present his plan to increase electronic trading at the NYSE on Thursday, in an effort to fend off critics who say the exchange's 211-year-old system for buying and selling shares is outdated and designed to benefit market insiders.
At a meeting of the exchange's newly constituted board of directors, Thain, on the job less than two months, will propose eliminating a NYSE rule that limits to 1,099 the number of shares that can be bought or sold electronically in any single trade, sources said.
Thain will also propose reducing or getting rid of the time, currently 30 seconds, traders must wait between placing electronic orders, the sources said.
If approved by the exchange's board and membership and the Securities and Exchange Commission, the two changes could dramatically increase the number and speed of electronic trades at the NYSE.
Such trades make up only about 6 percent of exchange volume. The rest of the trades are handled by "specialists," traders who occupy booths on the exchange floor and match buyers and sellers in individual stocks. The NYSE is the last stock market in the world to use such a model.
Critics, led by large mutual fund companies, have long complained that the NYSE's system is too slow and cumbersome. They say the system has been unfairly propped up by an SEC rule requiring that all trades be executed at whatever market quotes the best price, called the "trade-through" rule.
While the NYSE may quote the best price, the fund companies say, it does not always execute trades at that price. And some big institutional investors say they would be willing to sacrifice a penny or two per share on trades in exchange for the speed and anonymity afforded by all-electronic trading.
Electronic trading networks such as the Nasdaq Stock Market and Instinet Group Inc. are also lobbying the SEC to eliminate the trade-through rule. The SEC's market regulation staff, meanwhile, is planning to recommend to SEC commissioners that the rule be modified, but not eliminated, agency sources said.
Under the proposal, electronic markets would still have to match the best price offered at other electronic markets. But they would be allowed to ignore a superior price at slower, floor-based markets such as the NYSE, as long as that price was not more than a few pennies better.
Criticism of the NYSE's trading model intensified last year after Dick Grasso resigned as exchange chairman in the wake of a scandal over his compensation. Some argued that the old NYSE board, which included executives from NYSE-member firms, approved Grasso's $187.5 million pay package in exchange for his protection of the status quo.
The criticism gained more momentum after the SEC concluded last fall that specialist firms cost investors $155 million over a three-year period by improperly trading for their own accounts.
The investigation into alleged specialist abuses is ongoing. The SEC has told the five major specialist firms that it intends to file civil securities fraud charges against them. The specialist firms acknowledge some abuses but say the $155 million figure is far too high.
Thain, the former chief operating officer and president of Goldman Sachs Group Inc., became chief executive of the NYSE in December. He replaced former Citigroup Inc. co-chief executive John S. Reed, who took over as interim chairman and chief executive after Grasso's resignation. Reed remains at the exchange as interim chairman.
Thain, who helped Goldman invest in several electronic trading platforms, is viewed as an avid technologist eager to update the NYSE's trading model while protecting its position as the world's largest stock market.
His proposals on electronic trading have been largely embraced by executives at the specialist firms, who believe they can adjust their business models to remain profitable even as the exchange increases the amount of electronic trading.
It is unclear whether other NYSE constituencies will embrace the proposal, particularly the floor brokers who ferry buy and sell orders to specialists on the exchange floor.
At a meeting of the exchange's newly constituted board of directors, Thain, on the job less than two months, will propose eliminating a NYSE rule that limits to 1,099 the number of shares that can be bought or sold electronically in any single trade, sources said.
Thain will also propose reducing or getting rid of the time, currently 30 seconds, traders must wait between placing electronic orders, the sources said.
If approved by the exchange's board and membership and the Securities and Exchange Commission, the two changes could dramatically increase the number and speed of electronic trades at the NYSE.
Such trades make up only about 6 percent of exchange volume. The rest of the trades are handled by "specialists," traders who occupy booths on the exchange floor and match buyers and sellers in individual stocks. The NYSE is the last stock market in the world to use such a model.
Critics, led by large mutual fund companies, have long complained that the NYSE's system is too slow and cumbersome. They say the system has been unfairly propped up by an SEC rule requiring that all trades be executed at whatever market quotes the best price, called the "trade-through" rule.
While the NYSE may quote the best price, the fund companies say, it does not always execute trades at that price. And some big institutional investors say they would be willing to sacrifice a penny or two per share on trades in exchange for the speed and anonymity afforded by all-electronic trading.
Electronic trading networks such as the Nasdaq Stock Market and Instinet Group Inc. are also lobbying the SEC to eliminate the trade-through rule. The SEC's market regulation staff, meanwhile, is planning to recommend to SEC commissioners that the rule be modified, but not eliminated, agency sources said.
Under the proposal, electronic markets would still have to match the best price offered at other electronic markets. But they would be allowed to ignore a superior price at slower, floor-based markets such as the NYSE, as long as that price was not more than a few pennies better.
Criticism of the NYSE's trading model intensified last year after Dick Grasso resigned as exchange chairman in the wake of a scandal over his compensation. Some argued that the old NYSE board, which included executives from NYSE-member firms, approved Grasso's $187.5 million pay package in exchange for his protection of the status quo.
The criticism gained more momentum after the SEC concluded last fall that specialist firms cost investors $155 million over a three-year period by improperly trading for their own accounts.
The investigation into alleged specialist abuses is ongoing. The SEC has told the five major specialist firms that it intends to file civil securities fraud charges against them. The specialist firms acknowledge some abuses but say the $155 million figure is far too high.
Thain, the former chief operating officer and president of Goldman Sachs Group Inc., became chief executive of the NYSE in December. He replaced former Citigroup Inc. co-chief executive John S. Reed, who took over as interim chairman and chief executive after Grasso's resignation. Reed remains at the exchange as interim chairman.
Thain, who helped Goldman invest in several electronic trading platforms, is viewed as an avid technologist eager to update the NYSE's trading model while protecting its position as the world's largest stock market.
His proposals on electronic trading have been largely embraced by executives at the specialist firms, who believe they can adjust their business models to remain profitable even as the exchange increases the amount of electronic trading.
It is unclear whether other NYSE constituencies will embrace the proposal, particularly the floor brokers who ferry buy and sell orders to specialists on the exchange floor.
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