'Designated market makers' and other changes coming to the NYSE market

By: Ray Pellecchia

File Under: NYSE

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There have been two significant news articles in as many days in which our new CEO Duncan Niederauer talks about coming changes for the NYSE market, as well as other developments at NYSE Euronext.

A transatlantic challenge for new NYSE boss (FT.com) Excerpt:

One of the most immediate challenges faced by Mr Niederauer is to prove that his reputation in many quarters as an evangelist for electronic trading is undeserved.

Just a day after his appointment, Van der Moolen, a longstanding floor specialist exited the business, seemingly adding substance to the argument that the death of the trading floor is inevitable.

Mr Niederauer, however, claims the economics of the specialist business will change due to several rule changes at the exchange in the coming weeks, that are designed to make it a more compelling proposition.

Lehman Brothers is expected to be confirmed as the company that has inherited the Van der Moolen business this week and Mr Niederauer says several other 'high quality' companies have been kept informed of the development of the exchange's hybrid model, with a view to taking on a specialist or market making role.

Announcements about new entrants are expected early in Mr Niederauer's tenure, which officially began at midnight on Saturday.

Besides the challenge of attracting new specialist firms, while keeping existing market makers happy and fending off the challenge of smaller, mostly electronic competitors, the new chief executive's biggest challenge is integrating the Euronext business into the wider group.

Hi, 'Designated Market Makers' (WSJ.com) Excerpt:

In December, as part of sweeping changes to the role of floor traders in a world of electronic trading, Mr. Niederauer said he will propose replacing the century-old description of the auctioneers with what he calls "designated market makers." . . .

In recent years, the handful of specialist firms remaining at the NYSE have encountered setbacks, including a $247 million regulatory settlement, declining profits and recent rules that make it harder for them to trade profitably while stabilizing short-term market volatility.

Mr. Niederauer joined Big Board parent NYSE Euronext from Goldman Sachs Group Inc. in April, in part to fix the situation. His answer has been to propose an overhaul in the rules that apply to the way specialists trade NYSE-listed stocks. While many of the changes require Securities and Exchange Commission approval, Mr. Niederauer said he hopes they can be completed by early 2008.

Under the new model, specialists also will have fewer responsibilities because they no longer will have to refrain from trading in some circumstances.

The cast of traders is changing, too. Lehman Brothers Holdings Inc. is expected to announce today or early next week that it will buy the NYSE specialist business of Van der Moolen Holding NV. That business lost about $16 million in the first nine months of 2007, prompting the Dutch company to leave the business. . . .

Mr. Niederauer said two or three more changes are likely among trading firms in coming months.