• Nov
  • 27
  • 2007
  • 8:49 AM

Men At Work (at re-making the markets)

By: Ray Pellecchia
File Under: NYSE

I can't remember an article that offers a better look at NYSE Euronext's U.S. markets -- what we've done recently, what we're doing today, and where we're going -- than Traders Magazine's Men At Work.

The men referred to in the headline are our Duncan Niederauer and Larry Liebowitz, who discuss at length both the opportunities and the challenges. Excerpt:

... To regain lost ground, Niederauer and Leibowitz are taking steps to make the NYSE, NYSE Arca, and the organization itself more competitive. Within the company, a for-profit, publicly traded corporation since last year, the two are trying to transform what was traditionally an inward-looking, exchange floor-dominated culture into an outward-looking, customer-focused culture. Instead of running the organization for the benefit of specialists, for example, Niederauer and Leibowitz say they are trying to satisfy the people that deliver the order flow-the broker-dealers.

"In my 20 years on the sellside, I never felt like a client of the New York Stock Exchange," Leibowitz told attendees at this year's Security Traders Association annual conference. "That's despite the fact that at Morgan Stanley, Credit Suisse, and UBS, I represented a pretty good chunk of their order flow."

The exchange was run for those who had the most seats, Leibowitz told Traders Magazine. And those weren't the house brokers such as UBS. The result was poor communication between the exchange and the upstairs desks, he said, since the exchange neither took their recommendations seriously nor consulted them before making changes. "The attitude was: We are a monopoly and you have to trade here,'" Leibowitz said.

With its market share slipping away, the New York can no longer afford such arrogance. It has had to reconnect with the sources of its order flow. To that end, Niederauer and Leibowitz spend much of their time talking with traders-both sellside and buyside-to get a handle on their needs. ...

Highly recommended reading.

Comments

Excuse me for asking such an amateurish question, but with NMS in place and the mandate to fill at the NBBO, what is stopping the NYSE from designing an algo to always provide the NBBO? If the best bid is .20, beat it by automatically creating a .21 bid. If the NBBO ask is .25, beat it by automatically putting an ask of .24.

Wouldn't NYSE take 100% of market share that way? Does having 100% market share have a value? Seems that any relatively minor loss to NYSE that were to come from always providing the NBBO could be made up in market cap as analysts that zero in on traded market share would be pacified.

I know I'm missing much of the picture, but even if for only theoretical purposes, could explain the disadvantages to this approach?

TIA.

by bbb on November 28, 2007 2:15 PM

1. this would require the use of tremendous amounts of capital, although I am not sure whether it's theoretically impossible or not.

2. more practically, this would be disruptive to the markets. If every exchange followed the practice you suggest, it would be utter chaos.

3. even more simply, your suggestion is not consistent with the business of running an exchange. exchanges are supposed to promote price discovery and liquidity, not affect price-setting.

by josh on November 29, 2007 5:43 PM

Ray, whats going on with the specialists right now? There is zero participation from them, no price improvement, and no matching right now. Its terrible. It was actually getting better and it seemed like they started adding more liquidity and better price action. Ray, we need the specialists to add liquidity, and stabilize the price's. The value the specialists add is what makes the NYSE the best place to trade and its what makes the exchange different from the other exchanges. The new CEO has to get them involved if the NYSE has any chance of getting better for their customers. As always i thank you for the blog.

by tony dey on November 29, 2007 7:34 PM

thanks have a nice day!

by chantel on November 30, 2007 11:44 AM

Umm, where are the men at work?????????/

by Chantel on November 30, 2007 11:45 AM

Ray,

Again, I have to agree with Tony.

While I often feel like a broken record complaining about the lack of price improvement and liquidity at the bids and asks, I also feel like the NYSE sounds like a bit of a broken record promising it.

There has been no delivery of this promise.

Stocks still mostly trade 1x2 or something like that, with no size on either the bid of offer providing liquidity.

It's been a long year.

-DT

by Dinosaur Trader on November 30, 2007 2:07 PM

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