Upcoming NYSE rule changes: '...working aggressively on a number of paths...'

By: Ray Pellecchia

File Under: NYSE

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Tuesday's conference call concerning NYSE Euronext first-quarter earnings contained a lot of good information about most every aspect of our business. Plenty to read about in the transcript about futures, options, technology solutions, whatever strikes your NYX fancy, but as the New York Stock Exchange continues to be the main topic of conversation in this space, here's an excerpt that may interest Big Board traders.

Niamh Alexander - KBW - Analyst
Congratulations on a good quarter. I just wanted to touch on the smaller part of operating earnings, but still there's a lot of work going on to reshape the value proposition on the floor. And on the U.S. cash equities business, can you maybe give us an update? Because I think when we last caught up with Larry, there was a lot going on, a lot of discussions with the SEC. And I
think Duncan, you recorded last night about expecting maybe the floor presence to shrink even further. So perhaps you can help me understand what's changing here.

Duncan Niederauer - NYSE Euronext - CEO
Why don't I start on the floor piece specifically, because I did speak to some people from Reuters yesterday, so that's probably where that came from. And then I'll turn it over to Larry to give some more details on actually what we have in motion with the SEC and with the various communities.

So I was asked yesterday by some in the media about what our plans for the floor were, and I will tell you a couple of things. One is, most of you know we have already consolidated into the two larger trading rooms, the so-called main room and garage. It would not surprise me, as the market model continue to evolve and we continue to embrace technology, that more of the
risk management can be done off the floor. I think that would be positive for liquidity provision, so we're not going to resist that. Having said that, we're not about to turn this into a remote business.

So I think when I calculated all the factors, my view was it was definitely possible that we could consolidate the existing core NYSE business in the one large trading room; that wouldn't surprise me.

At the same time, remember that as we do the Amex transaction, we will have one of the floors reoccupied for what I would call a micro and small cap market. The stocks that are traded on the Amex now that will not transfer to New York or NYSE Arca.

And then we'll also have -- one of the smaller rooms in the back for a a footprint for a small options floor. The equity floor will probably happen late in '08, the options floor in early '09. So my guess is we will be having more people come to this building six to 12 months from now, not fewer. But I certainly could see consolidation from two rooms to one on the main NYSE business.

Larry, why don't you take it on what we're doing in terms of functionality and technology.

Larry Leibowitz - NYSE Euronext - Group EVP & Head of U.S. Execution & Global Technology
Sure. So I think there's a couple of threads here. One thread is that a large amount of our cost savings come from retooling the technology that supports the floor of the New York to be more in line with what we do across the rest of the firm, and so we continue to move along that path and make significant progress. Some of that would result in cost savings. Some of it results
in performance or latency reductions to our clients, which we started to roll out with our CCG [Common Customer Gateway] platform, which had a pretty significant latency reduction for people using that. It's somewhere around 35%.

That said, when Hybrid was put in, that was an initial response to regulation requirement to electronically link the market through the trade-through rule. What we've really been doing has been redefining the balance between the various constituents that represent our trading platform, whether that's floor traders, specialists, or electronic trading. And it's creating new value
propositions for each of those participants that helps us figure out what the right mix of each of them.

So as an example, we just announced rolling out electronic reserve on pilot stocks a couple of weeks ago. That was creating more transparency and more functionality to the electronic trading side of our constituents. We just announced I think it was yesterday that we're going to roll that out to the rest of the stocks as of this Friday. We're going to continue to add functionality as we evolve the platform. We're talking to the SEC about changing the rules to make the market simpler, more conducive to electronic trading, but also allowing a role for a market maker with obligations, more of a liquidity provider as we evolve the specialist role.

And then to continue to evolve the floor traders, have more functionality that makes more sense in an electronic world. So you will see in July, for example, rolling out algorithms in the handhelds, so that floor traders will be able to work algos from the floor, but also when large block trades happen, to be there to represent the customer. That will allow our upstairs traders to not feel that they are shut out when they give a trade to the floor, that they are also foregoing the benefits of the algo trading.

So it's a constant evolution, working aggressively on a number of paths, working with the regulators to get rules passed as quickly as possible as we change this model at a breakneck pace, still within the confines of maintaining the discipline of getting the cost out and the performance up of the underlying technology.

Those off-trading floor reserve orders Larry referenced are rolled out today, and we just posted an advisory to not use the OB (Or Better) order instruction on those orders until further notice.

Have a great weekend, my friends.