Ten Things I Like About the Coming Changes at NYSE

By: Ray Pellecchia

File Under: NYSE

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I know, I know, I'm a bit biased, but I like everything I've seen so far in these rule proposals (links to proposals here and here). I'm still on the learning curve on this, but right off the bat, here are some of the changes (most of which are pending SEC approval) that I think are going to be real positives:

1) "The look" goes away. Specialist algorithms will no longer get an exclusive, advance look at incoming orders. In connection with this and other changes in the specialist's role, going forward we're calling them designated market makers (DMMs). The role has evolved enough that a name change is justified.

2) Since they no longer have exclusive information, DMMs will be able to trade on parity. They will be no longer have to stand at the back of the line, which gave them no incentive to quote, improve prices and match orders. They will no longer be the agent for the Display Book. So they will be rewarded for quoting, which benefits other traders, the DMMs themselves, and New York Stock Exchange as a whole.

3) DMMs will have the "affirmative obligation" to maintain an orderly market in their stocks, quote at the national best bid or offer for specified percentages of the time, and facilitate price discovery at the open, close and in periods of significant imbalances. They will provide liquidity to the book based on a Capital Commitment Schedule that will be programmed into the Display Book but will receive no order information.

4) Eliminating the look means reducing order latency, because there will be one less stop for every order to make. Less demand on electronic message capacity, too.

5) DMM economic incentives will be transparent and based on performance, and their performance will be reviewed periodically.

6) The old, artificial barriers that no longer make sense in today's environment are coming down. DMMs will be able to integrate their floor-based trading operations into a related member firm, subject to strict information barriers. This will free up firms to make their talent and technology more mobile and multi-purposed across their upstairs and downstairs operations, and make the floor operations more cost-effective They will also have better access to upstairs capital and will be able to trade derivative securities on other markets for risk-management purposes.

7) Floor brokers will be perfectly positioned to provide their customers with access to the increased value and price discovery resulting from all of the above.

8) Apart from these particular filings, there are excellent changes happening for the floor brokers, too. They will have access to an NYSE-approved algo provider that will give them the ability to match the speed of upstairs smart routers. They will be able to use those algo's to peg orders and also execute trading strategies, including VWAP and convert and parity. Brokers also are getting a new service that helps them get blocks done. The new service enables them to electronically broadcast a stock symbol they're interested in, without giving anything else away; respond to pings from other brokers; and "subscribe" to symbols they want to keep an eye on for interest from others, just like RSS -- kind of like adding a new, electronic dimension to the floor conversation, helping them locate block-sized liquidity.

9) Customers will get a new order type: a reserve order that does not require that any portion of the order be displayed. The order will participate in automatic executions but will not be protected in manual executions, will not participate in the open or close, and the DMM will not have access to it. It's another choice for customers looking for that type of functionality.

10) The changes are starting this August and should take a month or two to implement -- again, pending the SEC's approval.

There's actually a lot more than 10 things in that list, but I had to group them. Nobody wants to read a top-23 list. Anyway, I hope I have those things correct. Colleagues, please correct me if I misread anything there.

Overall, sounds to me like we're trying for a better balance between high tech and high touch, and I'm all for that. We adopted Hybrid to comply with Reg. NMS. That's done. We got to compliance but at a cost of losing too much of our differentiation. Now is the time to move past that and go back to the future, so to speak -- reclaim the good things traditionally associated with NYSE: lower volatility, deeper liquidity, vibrant participation by everyone, value added. Speed it all up, and I wouldn't bet against us. For the first time in a long time, I'm a little stoked. I believe it can be done. Let's hope we got it right.

To all those who have been reading me patiently since forever, waiting for this news, sticking with us via your orders and your comments, let me say: thank you, sincerely. I hope you can see now, we have been listening. It's just a lot tougher and slower to make these changes than anyone can imagine. These proposals are 271 and 102 pages, respectively.

Are we there yet? Not yet, kids. Comment period, approvals and implementation ahead. But we're on our way. May your patience and loyalty be rewarded with a better market -- strike that, let's make it again the world's greatest market -- very soon