Putting NYSE Hybrid in context

By: Ray Pellecchia

File Under: NYSE

• 0 Comments
• Email Entry

I post this Bloomberg article from earlier in the week because it references the NYSE Hybrid Market.

Excerpt:

The decline [in the NYSE's share of trading NYSE-listed issues] underscores the urgency of adopting the Hybrid Market, a project that will cut the time to complete a trade to less than a second, just like all-electronic rivals. NYSE floor traders take an average of nine seconds, Thain has said.

All stock markets are losing share to securities firms, which match their clients' buy and sell orders internally for 29 percent of the trading in Nasdaq stocks and 14 percent at the NYSE.

NYSE Group Senior Vice President Robert McSweeney said the system will cater to investors who want speedier execution than the Big Board can now provide. The hybrid market will be in place by October, he said in an interview.

Just a few comments on the points raised in the article:

• Unlike many articles on the subject of share of trading, this piece to its credit mentions Nasdaq's loss of share of trading in its own stocks to NYSE Group (20.4 percent in June compared with 18.2 percent a year earlier). Relatively speaking, would you rather be the company with 20.4 percent of its competitor's market, or the one with 9 percent?

• The competition from securities firms internalizing customer orders is one issue, but an even more serious issue is that internalization puts the interests of those firms ahead of their customers' interests. Readers of this humble blog know our views on internalization, extensively ranted here and here.

• The Hybrid Market model is designed to give NYSE customers more choices than they have today, position us to grow our trading volume, and continue providing the market quality our customers have come to expect. I keep reading that it's effectively a silver bullet for share of trading, but share of trading is not that simple.

Consider two things:

One, the world is much changed from 1978, when as the article points out, we had a record 88-percent market share. The business is much more mature now. More competitors. Lower cost of entry. More electronic. Regulatory environment designed to foster competition. Communications technology and order routing software that enable multiple markets to be accessed contemporaneously. Lower commissions, which give benchmark pricing (derivative off the NYSE) the appearance of acceptability versus fuller price discovery. Decimals, penny spreads, pay for flow, rebates, preferencing. I'm not making excuses, just pointing out that there are many economic factors and trends to take into consideration.

Two, the share of trading you attract depends on other factors in addition to your ability to provide instant, anonymous, electronic trade executions. Ability to create the best price. Success rate in filling orders. Transaction fees. Price volatility, market depth and breadth, and other quality indicators. Levels of service and accessibility to customers. Best price, fill rates, low volatility and other quality indicators are categories in which the NYSE leads, and they cannot be counted out of the competitive equation.

For example, in an NMS world, the order goes to the automatically accessible market posting the best price. That's a two-parter. We're building the automatically accessible part, but we're not losing sight of the best-price part, either.

When people predict our demise, I instinctively want to respond, "Yeah, you and what army?" But when I get my big nose back in joint, I refrain from predictions, because I don't want to presume our success. That would smack of complacency. With Hybrid as evidence that we're listening to customers, I can predict only one thing: we will continue to fight for your business -- every trade.