The problem with the markets is not the switch to go electronic. The nasdaq, in the late 90's and early 2000's was completely electronic, but it was humans sitting at the computer screens making the trades. The rule changes have made it so that there is no reason to have human intervention. This is the real problem. The markets traded so much better with the mix of a human element to make the decision and a electronic platform or broker to trade with. Now there is just a electronic platform with minimal human intervention.

by josh on May 12, 2008 1:57 PM

trading in EDS today...very funny... LRPs...hello? anyone out there listening?? I think, however, i am talking to the wall about the chair.

by jt on May 12, 2008 3:07 PM

You bet people want to use the floor when volatility picks up. I was there just a few days after "Black Monday in 87" and other times when individual stocks have crashed. Market makers from other markets disappear, trades get laid off on the NYSE and its specialists that otherwise would not during good times. During the '87 crash NASDAQ market makers were notorious for not picking up the phones. We here in MPLS/St. Paul had the biggest SIPC bailout of a NASDAQ b/d just after the dot.com blowup, when volatility was high.

We at our firm don't need volatility to value the floor. We want point of execution information on a regular basis and that comes from our floor brokers that we have built relationships with for almost three decades.

Remember the 1975 Chris Welles book, "The Last Days of the Club." He predicted the imminent end to the specialist system, floor brokers and the floor itself. That was 38 years ago!

by Bart Ward on May 12, 2008 6:05 PM

Josh -- Agreed, a balance between high-tech and high-touch is preferable.

JT -- Spoke with a colleague earlier today who says that you have a good point on LRPs. He believes we might take another look at the issue. Will keep you posted.

Also, I erred on my response to your previous comment. Manual trades happen 30,000-40,000 times a day, not the 140,000 times a day I stated. I got that number over the phone and must have heard it wrong. I'll correct the other post as well. My apologies for that.

by Ray Pellecchia on May 12, 2008 6:33 PM

I think it's become obvious that your customers prefer a true blend of human & electronic trading. During extreme volatility it becomes even more important. I hope that the next wave of changes produces a much better version of the Hybrid with more specialist involvement, price improvement, and greater stability. Thanks ray.

by tony dey on May 12, 2008 7:06 PM

Ray: Do you have any data re. use of reserve orders? Obviously it's early days, but our experiences thus far have been pretty positive. Along the lines of the proper balance between high-tech and high-touch, as you might say... Thanks for any information you can provide. JS

by Jamie Selway on May 12, 2008 8:51 PM

I still read the blog once and a while and find it comical that almost two years into this hybrid we are still talking about the same deficiencies. The NYSE is finished. It now does less than 30% of the volume in listed issues, with that share declining every single day. Nobody post liquidity anymore, and why should they. I'm not gonna make a market in a stock if I have no idea where the liquidity is. Heres a great idea, lets create a market where all the liquidity is aggregated at price points in a central location and is posted for people to actually see. (I believe the term is transparency) At the same time we could have banks that have a representative commiting his own capital to make a market and smoothing out intraday volatility. Imagine that! Now that would be a good place to trade.

by jack on May 12, 2008 10:27 PM

Tony -- Agreed. Thanks for the coment.

Jamie -- Thanks for the question. Will ask around; I'm sure we'll have some numbers shortly.

Jack -- We're anything but finished, but I guess only time will tell if you're correct. In the meantime, we're going to continue working on enhancing our market, and I'm going to continue talking about it here. Thanks.

by Ray Pellecchia on May 13, 2008 5:40 AM

Ray,
Do you know if there have been any studies looking into reg nms and whether or not it has been beneficial to the markets. Obviously, I believe it has been the worst move the sec has made since decimalization. If the nyse would fight to have reg nms overturned, they would be able to get their market back. Trading volumes would increase, and profitability would explode. I know the markets did crazy volume during certain months due to extreme news and fear in the markets, but now you see that without these catalyst the volume has dried up. Prior to reg nms, there actually could be a high volume day without the cause being the fear of our financial systems collapsing. The nyse will only gain its market share back if putting a order through the dot system or a floor broker can get you a different result then placing it through a ecn. Reg nms does not allow that to happen.
Thanks again for a place to express our concerns

by josh on May 13, 2008 8:24 AM

Jamie -- Last Friday, the first day the orders were available, we had 584,446 DOT Reserve Orders; yesterday, 807,552. You're right, it's early days, but I think that's an encouraging start, especially considering that most firms have not yet joined the party.

Josh -- I don't know of any post-Reg. NMS studies, but at the SIFMA conference I attended last week, SEC officials spoke of reviewing the impact of the rule at some point. However, I wouldn't pin any hopes on rolling back NMS: the SEC's Robert Colby, Deputy Director, Division of Trading and Markets, called the rule "a roaring success." And Eric Sirri, the SEC's Director of Trading and Markets, also sounded very positive about it in his speech at the conference, here: http://www.sec.gov/news/speech/2008/spch050908ers.htm

by Ray Pellecchia on May 13, 2008 1:21 PM

Ray: Thanks -- good to see growth as people begin to use reserves. If you could provide more information as things progress, it would be great.

Bob didn't really say "roaring success," did he? I don't know anyone that would agree with that. Hopefully, at some point, we actually see some data to support that notion. Thus far, people that have taken at Nasdaq market quality -- where the market was electronic, but had no trade-through rule -- have found little evidence that Reg NMS has changed anything. (Other than increased compliance and lawyer bills, of course.) JS

by Jamie Selway on May 13, 2008 4:09 PM

Jamie -- On the Reserve Orders, will try to keep an eye out. And on Bob, yes, he said exactly that. I guess there will be more to come at some point on the evaluation front, but as he and other speakers noted, the SEC has no shortage of other priorities absorbing its time these days.

by Ray Pellecchia on May 13, 2008 4:57 PM

It just goes to show us how really dis-connected the SEC is about what works best in the markets. I was one of the fools who thought Mr. Donaldson was going to make some positive changes a few years back. thanks ray.

by tony dey on May 13, 2008 5:32 PM

Ray/Josh - Regarding the question of studies on the post Reg NMS market I would suggest starting with the STA. A recently released write up is available free of charge at -

http://www.securitytraders.org/

The association made comments on the Order Protection Rule, Reg SHO, market openings, volatility, and market data fees. The request that only one venue is used for opening a security seemed to have gotten the most buzz. SEC's Erik Sirri responded saying let the markets decide. NASDAQ claims their open is more democratic, faster, efficient, and transparent compared to the NYSE's. NYSE says they have the largest liquidity pool and are always enhancing the offering. Either way NASDAQ has secured about 50% of the open volume in AMEX securities and that figure is growing.

by Vlad Khandros on May 13, 2008 9:51 PM

Ray, I'm sure that the sec has no desire to admit or understand that they have made a mistake. But do you know if the execs at the nyse are happy about reg nms. Because if they are not, and can show that it is a negative to a orderly market, then maybe the most important financial institution in the world can have some influence over how their market is run. I have always been curious if a fight was ever put up over this issue or did they actually think it would be a positive. It is just hard for me to understand why the nyse would just go down without a fight(over securing their market quality). Or maybe they did fight and the sec couldn't care less.
Sorry about the rant, this is just something i have wondered for a long time. Maybe you can help me understand how all these changes were actually allowed to take place.
thanks again,

by josh on May 13, 2008 10:43 PM

Vlad -- I've seen the STA's report; I would just clarify for anyone interested in a study that it's a white paper, not a study.

On the opening, I read Mr. Sirri's comments, and I've seen Nasdaq's bogus claims. I side with our Larry Leibowitz, who was at the same conference and said in response to a question that the dual openings are confusing to investors. He cited what NYSE is doing to speed our openings, and also said that our openings take place about 20 seconds behind Nasdaq's on average, but that 20-30 percent of Nasdaq's openings are outside the full-day trading range for the stock. Larry asked a good question on that last point: why would you want to do that to a customer? BTW, I have no idea how much volume Nasdaq does in the Amex open, but I know they do 2-3 percent of ours.

Thanks for writing, Vlad.

by Ray Pellecchia on May 14, 2008 8:23 AM

hey ray,

ok so now that we have come to the conclusion that LRPs provide no value...when will you and your colleagues decide to 1. spread them out a little more (esp on the open) or 2. get rid of them all together?

Thanks,

j

by jt on May 15, 2008 1:20 PM

JT -- All I know right now is that we're going to review it. Will keep you posted.

by Ray Pellecchia on May 15, 2008 2:10 PM

I can understand having an LRP for a large order, but to have one on 100 shares, causing the ECN's to bid/offer through the market by 10, 20 cents in ridiculous. It's creating an inefficient market unnecessarily.

by joe on May 19, 2008 12:02 PM

Ray,

Josh's point about REG NMS being a detriment to the quality of the market pulled me out of the woodwork...

Also, can you address the lack of volume trading on the NYSE? Has it all just moved to Arca, or what?

I notice bad fills and choppy market when the volume is weak. If you could get the volume back on the NYSE, the impact of the Hybrid may not be as bad as it feels to daily traders.

As always, thanks.

-DT

by Dinosaur Trader on May 20, 2008 10:10 PM

DT -- Welcome back from the woodwork.

No, all the volume hasn't moved to NYSE Arca. NYSE, excluding Arca, continues to have the largest share of trading in our listed stocks. I don't mean to sound sanguine about that, because our lead is under attack every day from every competitor, and we're fighting for every trade. I'm sorry I can't be more specific than that, because we don't break out NYSE from NYSE Arca, and I have to abide by that policy whether I agree with it or not.

That being said, overall trading volume appears to be down across the markets lately. I don't know of any good way to explain why volume is heavier in one time period than another, except when there are obvious drivers like big swings in the market, major economic news, M&A activity, seasonality, etc. If someone knows of good analysis into why total trading volume across the markets comes and goes, I'd be happy to take a look.

We're continuing to put forward as fast as we can new features and rules to attract liquidity. Most recently, our new Reserve Orders for off-floor traders are off to a promising start. There is much more to come. My boss Duncan said recently that given the regulatory process, we might not see some of the biggest changes in the market model be implemented until the fourth quarter.

In the meantime, I hope you'll hang in and not go all extinct on us. I've been looking in on your blog from time to time and will continue to do so. Hope you'll see fairer trading skies soon.

by Ray Pellecchia on May 21, 2008 6:20 AM

Ray, dont take this personally as I'm sure your an honorable guy but it just occured to me that you sound like Bagdad Bob (the old Iraqi propaganda minister) when talking about the NYSE. Here are the facts: NYSE's share of volume has been decimated. It seems to rarely be on the inside quote, and there is never size or depth across its book. It is the slowest place to get an execution. And every day the quality of trading gets worse. Those are the facts... Jack

by Jack on May 21, 2008 8:48 AM

Jack -- LOL on the Baghdad Bob. Look, I'm not saying that everything is hunky-dory. I mean, of course our market share isn't 80 percent anymore; how could it be, given that there was no competition and no Reg. NMS back then, and there's plenty of both today.

We're hardly alone in that. Bloomberg reported earlier this week:

"May 16 (Bloomberg) -- Nasdaq OMX Group Inc.'s share of U.S. stock trading fell the most in eight months and trading of its own listed shares sank to a three-year low after rival NYSE Euronext lowered transaction costs to lure away business.

"Nasdaq matched 29.2 percent of the 6.75 billion shares that changed hands daily during April, down 1.4 percentage points from a month earlier, according to data posted today on the New York-based company's Web site. Nasdaq has lost market share for three consecutive months, the longest streak since 2005.

"Chief Executive Officer Robert Greifeld told analysts last week that Nasdaq planned to stem the decline with a new round of changes to the fees brokers pay for executing trades. His counterpart at NYSE Euronext, Duncan Niederauer, has cut trading costs three times this year, seeking to lure back business from some of Wall Street's largest brokerages."

I think part of today's situation is Reg. NMS; part of it is more competition; part of it is how NYSE has hanged; and part of that change has been to comply with Reg. NMS. It's all tied together. All we can control is how we will evolve our market going forward.

On the blog, I try to field the questions that are asked of me, but more and more, in the things that I post myself, I'm trying to focus on what we're doing to attract more liquidity and participation, and getting your feedback on that. We are where we are; I know we're not at the inside enough -- to me, the only thing worth our breath talking about is what we're doing about it. I hope to bring you more news on that front soon.

In the meantime, "There is no invasion!" (followed by the sound of rumbling tanks).

by Ray Pellecchia on May 21, 2008 12:51 PM