Dark pools are not the answer.

As you know in the old day's dark pools were the specialists and our color of the market was our floor brokers. Between the two there was a deep liquid market.
I am the biggest fan of the NYSE and the floor in particular, but the current system is broken. A few years ago it was hard to become a specialist because you had a role to play...You made the markets, for better or worse...some times you got rolled, but most times you provided a service to the customers and the street. More often than not there was a profit to be made from your services.
flash forward to now-there is no participation from the specialists, the NYSE has to "pay them" to participate a certain percentage of the time. It's like the government subsidising farmers not to grow crops. I find it sad that the worlds epicenter of capitalism has to subsidise the specialists to do what should work properly AND profitably for those willing to take the risk and have the skill and knowlege to sink or swim and if they sink there's plenty more behind them willing to take their place.
On the optimistic side people keep saying that a specialist is needed for the more illiquid stocks and I have found this to be true but they don't or can't participate under reg NMS. I go to buy 1000 shares of a preferred and get four prints, the last being over a point from my last print and I know the specialists either aren't bothering to participate or can't.I call DOT and am told "well that's where the LRP was for the specialist"
Maybe I'm just getting old Ray. I can't stand seeing the floor and the people that I've done business with for years slowly lose their relevance because the NYSE hasn't seemingly thought this through. In my opinion and I'm sure many of my upstairs traders agree, the quality of the executions and market color have gone by the way side in an environment where the specialist and the NYSE customer can't even get a bid or offer for size because some government regulation NMS can't be complied with.

In conclusion, if the NYSE is to survive as a relevant service and successful business model the specialists MUST become more involved ON the bid or offer, FOR size. This is essential to differentiate it self from it's competitors and be relevant. Don't brag to me about Arca...It's a joke. If you look at time and sales it's bids and offers change 5 to 10 times a SECOND. This is not how a market place should function. It should be a market not a tease.

I love the NYSE and your blog is great Ray, but i'm really frustrated with how the exchange is evolving. If my floor broker didn't have the experience to get price improvement from his own reading of the spx direction etc. there would be little reason to use the NYSE as there is very little block crossing at the posts. Please fix it because dark pools are a leaky band aid for an exchange that should work.

Thanks for the forum,

Steve.

by steve on September 28, 2007 12:30 AM

Steve -- Thanks for your note. I'm always happy to hear what people are thinking, even when they're not happy with us.

A couple of thoughts.

One, on market-quality issues, I hear you. A lot of people here are working extremely hard on enabling specialists to participate in the market when they can add value, and for floor brokers likewise to provide a valuable service to their customers, as you note yours does. You've been reading here about a number of these steps over the most recent weeks and months, and others are pending approval or in the works. I hope that collectively these things will make a difference. I'll continue to update everyone on these initiatives.

Two, again, I hear you; talking about NYSE Arca or dark pools has nothing to do with strengthening the market quality of NYSE. However, I'm going to continue to try to broaden this blog to talk about all the markets, platforms, products and services of NYSE Euronext, not just New York Stock Exchange. But please be assured I'm not forgetting where my bagel is buttered (actually, cream cheese today): right here at 11 Wall St.

by Ray Pellecchia on September 28, 2007 10:46 AM

Steve,

I agree 100% with your comments, especially about the example you offer about throwing in an order for 1000 shares... you're liable to be filled anywhere, but you can't tell exactly where because the tape offers no insight anymore.

Now Jim, you said, "Market-impact and opportunity costs are the direct result of investors having no recourse but to transact bulk liquidity through a transparent marketplace."

Why is it that bulk investors shouldn't expect market impact? Basically, guys buying 2000 and 3000 shares lots are now absorbing the market impact...And what's wrong with "forcing" these large players to go through a "transparent marketplace?"

Heck, let's forget about trading stocks then and just agree that they will rise based on historical standards. No more fluctations, just a percentage that you're guaranteed... oh wait.

-DT

by Dinosaur Trader on September 28, 2007 11:14 AM

Ray, Thanks for all you do. I hope NYSE gets the kinks worked out. I think they should retain the floor and will if the specialist and floor brokers can interact in a meaningful way.

By the way, our floor broker did another great job for us today...He's got a good sense of mkt direction.
Believe me, I'm rooting for the exchange.

To DT- great blog.

by steve on September 28, 2007 4:33 PM

Great post Steve. I agree 100% in everything you said. All of the guys i know involved with this business feel exactly the same way. I am also rooting for the exchange but it's getting harder to do it with very little positive results (so far) and constant fee increases. I wouldn't mind paying a little more to the NYSE if they did make the market a better place to do my business. I want to have more confidence in Hybrid and have the specialists provide more price improvement & matching, and more liquidity. Thanks Ray for your blog.

by tony dey on September 28, 2007 6:02 PM

Steve,

Thanks! It probably wouldn't exist were it not for the Hybrid Market!

-DT

by Dinosaur Trader on October 1, 2007 11:22 AM