"Maybe we need to stop focusing on trading volume statistics and start thinking about market functionality and quality. And what are the real mechanics behind best execution in a non-displayed environment?"

If you believe this? Then why has it taken so long to fix one of the most pathetic excuses for a "market" ever? (Also know as the NYSE hybrid model, for those who have been asleep for about 2 years...)

by jt on July 7, 2008 2:02 PM

I agree JT. Many of the NYSE customers who have been suffering through the HYBRID know exactly what you mean. It always seems that the NYSE does everything EXCEPT fix the real problems. I have to be honest and say that not one of the recent changes has addressed the negative aspects of the Hybrid. Who really needs 5sec updates on imbalances? I can understand updates at 3:40 & 3:50 and maybe even 3:55 but at some point its just a waste of information. Thanks.

by tony dey on July 7, 2008 5:10 PM

Tony,
We have complained about hybrid since inception. Thain built a flawed model and jumped ship. It was lauded it by NYSE/ARCA brass as the new frontier in trading. The stock price proves that we were right... and they were wrong. Maybe when the stock price goes back below the merger date... they will spin off ARCA and go back to the way it used to be. 2 more weeks like the last 2 and it could even be lower. Lets all hope... although we know that won't happen.

by David on July 8, 2008 9:15 PM

When are we going to get more specialist participation to control the volatility? Everyday i see stocks close up/down 50-80 cents on 2 thousand share prints. When we will see increased price improvement and liquidity that was ALWAYS the foundation of the NYSE? Its painfully obvious the mistakes that were made but lets get beyond that now and go foward by getting rid of what hasnt worked and bring back what made the NYSE the best exchange in the world. Thanks

by tony dey on July 9, 2008 9:15 AM

NYSE is the new Nasdaq.

Admit it.

-DT

by Dinosaur Trader on July 9, 2008 11:05 AM

Jamie -- Nice comment (and on topic!). Thanks for writing. More conversation to come on this (and you're right, probably even more press).

On some of the other comments, guys, guys, guys, c'mon. Let's keep it on topic, and constructive and respectful. I'm not going to respond directly to the specific things said. I've been doing that, and I'm obviously not doing it well enough. What I am going to do is take my cue from something Tony Dey said, and just look forward.

I've written about what we're doing, here and here. These changes are starting next month and continuing into October, and I'll keep you posted every step of the way.

Thanks for writing. I still love you.

by Ray Pellecchia on July 9, 2008 12:35 PM

Jim:

I think your observation is spot-on: scads and scads of "dark pools" trading small sizes are clearly of decreasing marginal utility. (Possibly even less useful: the steady stream of articles about how complex and confusing things dark pools are, requiring traders to read more articles about... you get the picture.) Practitioners have felt this way for maybe 12 or 18 months.

Which leads to the question: when will NYSE get on its horse and become the largest dark pool? Nasdaq's hidden order and ARCA's MPL order are good places to look; combine them with a "minimum acceptable quantity" instruction to "block-ify" the process. Educate the residual floor brokers -- walking, talking versions of "dark liquidity" -- and build on the early success (yet strangely unheralded) of NYSE's reserve order. Provide everything via technology, so that all market participants are on a level playing field. Leverage the exchange's role as an anonymous, unconflicted, liquid, low-cost place to trade.

Result: Reduced complexity and search costs for those seaking liquidity.

Bring it on. Increased market share awaits.

JS

by Jamie Selway on July 9, 2008 2:06 PM

I agree JS, and have it trade in nickel increments and the volume & order flow will EXPLODE. I have said almost the same thing last year. Why dont the NYSE just do it already? at this point and the recent stock price of the NYX odds are things would only get better for the exchange.

by tony dey on July 9, 2008 4:44 PM

Dark pools are one of the many problems in the market today. The amount of volume that goes off on venues that not every trader can access or at least see is growing day by day. Over that past couple years it has become a popular opinion that orders should have no impact on the market. I don't understand this. The nyse USED to be able to handle large block orders as well as small orders. There was no need for dark pools. Dark pools, computer black box trading, hybrid, and reg nms are all new to the trading world and in my opinion negatives to market quality.

by josh on July 9, 2008 4:58 PM

Sorry my comment appears out of sequence above. Wrote it before Jamie weighed in, then saw his comment before I posted mine, went to edit mine, and got foiled by an automatic timestamp. Curse you, auto timestamp.

by Ray Pellecchia on July 9, 2008 5:22 PM

To Tony:

The thing about nickels is that... they'll just never happen. And given that Thain supported Reg NMS (anyone know why yet?), it's pretty much impossible to create a nickel-based block system while others are trading on pennies.

That said, the economic effect of aggregating liquidity on size increments -- via a minimum, such as 10k of 25k, say -- still exists, as Jim suggests in his post. Just look at Pipeline, for example. So while the NYSE can't do much by increasing the price increment, there are interesting possibilities around increasing the size dimension.

To Josh:

Agree with your diagnosis, if not the suggested cure. It's sort of a dirty little secret about dark pools that people equate the midpoint with no market impact. That may be true of a 500-share componet fill in a dark pool -- at the mid, so no market impact. But what about the fact that as you traded at the midpoint 123 times over the course of an hour, the midpoint moved against you 2%? No "tactical" market imapct, sure; but obviously tremendous impact overall.

To me, all this argues for more careful use of continually improving technology, not turning back the clock to the "good ole days." It's a substantial opportunity for NYSE.

JS

by Jamie Selway on July 9, 2008 6:46 PM

I respect your take Jamie but i disagree about the nickels. I think a minimum as you say of 10k - 25k bids/offers, size would gravitate at 5 cent increments naturally. I am not suggesting to go back to the "Good ole days" per se, but instead utilize some of the positive aspects of the pre-hybrid system with the added dimension of the current speed and tech advances. A true "Hybrid" with more specialist added stability & a real chance for price improvement.

by tony dey on July 9, 2008 8:01 PM

Jamie -- NMS was developed long before John Thain arrived in January 2004, though not formally unveiled until two or three months later, if I remember correctly. But at that point, it was adapt or die. Go fast, or have everyone trade through you.

I think he did everything he could possibly do to comply with the rule but still design something that retained the best aspects of our market. But the pendulum had swung too far against us, amid the compensation and governance scandal of 2003, and the trading scandals that preceded it. Now we are working on reclaiming our differentiation, and that's why I appreciate your suggestions. Thanks.

by Ray Pellecchia on July 9, 2008 8:20 PM

Ray:

As I recall, NYSE was the only major market center to support NMS. Nasdaq? Against. ARCA? Against. Inet? Against. My sense is that if NYSE had pushed back from the over-engineering of our markets by SEC staffers, it wouldn't have happened. Then, if NYSE wanted to experiment with a block marketplace based on nickels or dimes that might trade-through a 100-lot priced a penny better (the horror!), it would have that right. The effort would rise or fall based on its merits, as determined by the marketplace. Like a normal business.

Instead, Thain went the pro-regulatory route. And now, as Larry Liebowitz very rightfully pointed out at SIFMA a few months ago, the SEC spends time on meaningless interpretations to NMS, as opposed to more important issues.

It's the scene from "Cool Hand Luke" over and over... "Luke, what's your dirt doing in my hole? Sorry boss. Luke, what's your dirt doing in my yard..."

JS

by Jamie Selway on July 11, 2008 2:28 PM

Jamie -- I understand your point. Could it have gone differently? No way to know for sure. The environment sure was different then.

Question now is, where do we go from here, and that's why I appreciate your and everyone's suggestions on that point.

Nice "Luke" reference!

by Ray Pellecchia on July 11, 2008 4:38 PM

JS- Great point, and "Cool Hand Luke" was one of my favorite movies.

by tony dey on July 11, 2008 4:55 PM

I suppose that many who reply here work in the industry and will profit from the nickel increments. As a consumer I'm very happy with the cent increments. Think of the slippage you would have when we go back to the old situation.

I (and I'm sure many other retail customers) would never touch a share that moves in nickel increments.

by nick on July 12, 2008 7:40 AM

The two things about reverting back to nickels is that it is not realistic or practical. The tangible reductions in spread costs (a good thing for all investors albeit a small component of overall transactions costs), the explosion of new liquidity-providing, high-frequency investors and the regulatory focus on more accessible and competitive markets make a repeal of decimalization highly unlikely.

The other thing about reverting to nickels is that it will not solve the problem of price volatility and difficulty sourcing liquidity. (In fact, it would be a boon to dark markets. In addition to pegging to the mid-point, investors would also have room between a more generous spread to utilize the negotiation features of dark pools.) The transparency and market interaction needed for viable price discovery will always be in contrast to the opacity and informational control needed for size discovery regardless of whether it is a nickel or penny market.

But price discovery and size discovery are not necessarily mutally exclusive. The Arca MPL order type, the new Reserve Order types, the NYSE block facility and the proposed NYSE new market model are effective ways for investors to not only participate in both but also to increase the liquidity and reduce the price volatility in our marketplace.

The challenge of our unfolding market structure is to balance the needs of both without compromising the particular value of either.

by Jim Ross on July 15, 2008 9:08 AM

Hi,

I have been reading this blog for some time now but never bothered to comment until today. Wanted to let you know that I am a fan and enjoy your work.


Thanks,

by Queenudge on August 3, 2008 1:43 PM