• Oct
  • 24
  • 2008
  • 11:58 AM

Enhancements Of NYSE Trading Model APPROVED

By: Ray Pellecchia
File Under: NYSE

OK, I know, the market looks grim today, but how long have I waited to post this news? Exactly as long as you've waited to see it, my friends. This is one press release I was happy to write and have been dying to publish The entire text is pasted below, minus the boilerplate. More details about the rollout will follow in the coming days.

NYSE Aims to Maximize Market Quality and Competitiveness
With Newly Approved Enhancements of Trading Model
-- SEC Approves New Rule Set and Trading Tools
Designed to Benefit NYSE Listed Companies and Traders --

NEW YORK, Oct. 24, 2008 – The New York Stock Exchange, a subsidiary of NYSE Euronext (NYX), is moving forward with a revised rule set and advanced trading tools designed to maximize the NYSE’s market quality and competitiveness in today’s increasingly electronic trading environment. The initiatives further distinguish the NYSE from competitors and provide greater value to customers by enhancing the Exchange’s unique market model with new benefits and functionality.

The Securities and Exchange Commission (SEC) today approved two key initiatives to provide NYSE-listed companies and their investors as well as the trading community with lower price volatility; smaller spreads between best bid and offer; greater price improvement; more active participation by a broader range of market professionals; and overall deeper liquidity.

“Fast, electronic trading is the norm now, and our trading customers are looking for us to go beyond just fast and electronic – to offer something more. They want a market that encourages participants to add liquidity and helps them trade larger orders more efficiently,” said Lawrence Leibowitz, NYSE Euronext’s Group Executive Vice President in charge of U.S. Markets and Global Technology. “The NYSE is providing customers with a unique range of solutions for these challenges -- a rich combination of high-tech and high-touch features that no other market offers. Our listed companies and their investors also stand to benefit from the resulting tighter spreads, lower volatility and higher level of price improvement.”

Timetable for Transformation

Specifically, the SEC today approved a next-generation market model filed by the NYSE in June, and a new pilot program unveiled just today to attract new liquidity providers. Implementation of the new initiatives will begin next week and be completed in November.
• Specialists will be transformed into Designated Market Makers (DMMs) who have accountability for providing liquidity, better access to capital and risk-management capabilities, and are on an even playing field with other market participants in terms of trading parity and access to information.
• DMM quotes will be on parity with those of floor brokers and those on the Display Book, encouraging more DMM participation and higher market quality.
• The DMM’s algorithm will no longer receive a “look” at incoming orders. This ensures that an intermediary will not see orders first, and that DMMs compete as a market participant.
• All market participants will have the opportunity to send a new type of reserve order with a published quantity of “zero.” This order will not be displayed to the DMM. Incoming orders will trade against better-priced dark interest before trading at the published NYSE best price, resulting in greater liquidity.
• DMMs will provide price improvement and match incoming orders based on a new Capital Commitment Schedule, which will be added to the NYSE Display Book and will receive only public information about orders.
• DMMs will have the obligation to maintain an orderly market in their stocks, quote at the national best bid or offer a specified percentage of the time, and facilitate price discovery at the open, close and in periods of significant imbalances.
• Putting the DMM’s actions directly into the Display Book will further reduce order latency.
• A newly announced pilot program will establish Supplemental Liquidity Providers (SLPs), a new class of upstairs, electronic, high-volume members incented to add liquidity on the NYSE. The program will reward aggressive liquidity suppliers, who will complement and add competition to existing quote providers.
o SLPs will be obligated to maintain a bid or offer at the National Best Bid or Offer (NBBO) in each assigned security at least 5 percent of the trading day.
o The NYSE will pay a financial rebate to the SLP when the SLP posts liquidity in an assigned security that executes against incoming orders. The goal is to generate more quoting activity, leading to tighter spreads and greater liquidity at each price level.
o SLPs will trade only for their proprietary accounts, not for public customers or on an agency basis.
o An NYSE staff committee will assign each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue. The pilot will start with a focus on highly active issues, and gradually expand its coverage.
o A member organization cannot act as a Specialist/Designated Market Maker and SLP in the same security.
o The SLP will have the same publicly available trading information and market data that all other NYSE customers have available to them.

Additional enhancements of the NYSE market model unrelated to today’s approvals by the SEC will be announced as they are implemented.

Do I sound a little happy about this? I hope these changes will bring everyone better trade executions in the days and weeks to come.

Thank you again for your patience and perserverence wrth this (and with me!). We are finally on our way.

Comments

Ray,

Glad to hear.

Was the specialist’s advanced look at incoming orders an advantage in this current environment? I don’t think DMMs are losing much in the new model.

by Scott M. on October 24, 2008 1:48 PM

Scott -- People certainly perceived it as an advantage, even though specialists have had to yield to incoming public orders; in effect, they're always at the back of the line.

Better to remove the look, enable DMMs to trade on parity and be able to get to the market when they can add liquidity and value. Not to mention, give them incentives to do just that.

Thanks for writing, Scott.

by Ray Pellecchia on October 24, 2008 2:33 PM

Ray,

You have been waiting and do seem a bit happy about this news! For me and maybe others, can you explain how this can possibly effect expenses, speed and/or market share? Does this approval have any effect on the above 3 items?

by Mark T. on October 24, 2008 2:47 PM

Mark -- We don't give guidance so I can't comment on expenses, but regarding speed, I can say that this will reduce order latency; and regarding market share, we believe it will make our market more competitive. Sorry I can't be more specific. The proof will be in the pudding once this rollout is completed and we can look back to assess it and determine next steps.

Thanks for writing, Mark.

by Ray Pellecchia on October 24, 2008 4:31 PM

Ray,

Can you verify the validity of this segment from an article that might have been published in Tradersmagazine:

Goldman Sachs, operator of the Spear, Leeds & Kellogg specialist firm, is also bullish on the future. It told shareholders in its first-quarter report that it expects the NYSE "to recapture approximately one-half of the market share that it lost in 2007." Goldman also believes "we will increase the market share of our NYSE specialist business and, as a designated market maker, the profitability of each share traded."

Or what are your thoughts on it? Regain HALF of the market share it lost in 2007??? What are your thoughts?

by Mark T. on October 24, 2008 6:29 PM

Mark -- I can't comment on specific market-share projections. I think that would be tantamount to giving guidance.

I think that if we're giving the Designated Market Makers and the Trading Floor Brokers the right tools and the right rule set, we will be the most competitive market for our listed stocks and things like market share will flow from that. If we're in a better position to compete for every order, the market share will take care of itself.

Thanks for writing, Mark.

by Ray Pellecchia on October 24, 2008 7:45 PM

I think its very possible for the NYSE to regain a big percentage of the lost market share IF.. Trading becomes more stable, Specialists add much needed liquidity, the point swings on 100 share prints come to an end, and there is more size on the bid/ask for traders to access. I really hope that these are some of the positve changes that occur. I will be the first one to buy some NYX stock if trading gets better. thanks Ray.

by tony dey on October 24, 2008 7:53 PM

Ray,

Sounds good. Will there be, or is there already, a list of stocks trading under the "DMM style?" And also, any elaboration on the 'zero' quantity order would be great. Thank you,

j

by jt on October 27, 2008 9:09 AM

How do you become a SLP? What average daily volume is used for LRP calculations?

Thanks, Brad

by Brad on October 27, 2008 11:42 AM

To all Blog Readers,

I have noticed, over the last couple of months, the spread of volume executed between NYX and NDAQ has shortened! NYX used to execute about 2.5 - 3x the volume of NDAQ. If you look at today's volume... it is only at 2x. Approx. 4+ billion for NYX and 2+ billion for NDAQ. I hope NYX is serious about going fully electronic VERY soon! If the NYX wants to keep the DMM system, thats fine and they are changing their rules, but NYX only has about 6months - 1 year to get it right or risk falling to the #2 or #3 exchange in the world! .... Time will tell... Or maybe Oct. 31st "they" will tell us something.

by Mark T. on October 27, 2008 3:52 PM

Just checked the volume on NYSE.com and volume jumped from 4.0 billion to 5.1 1 minutes after my previous posting LOL NYSE.COM doesn't seem to have real time volume quotes for itself. At times, it states CLOSED for NYSE in the middle of the day.

by Mark T. on October 27, 2008 3:53 PM

Going fully electronic is the last thing the nyse needs to do.
As a trader we sometimes get caught looking backwards. This usually accomplishes nothing. But in the case of the nyse, this might serve them well. Traders are looking for a market where the quote is not 1x1. Speed is not everything. Depth and quality of the market are just as important.
I see Mark T on this blog quite often. If you don't mind sharing, I would love to know what you do for a living?(trader,fund manager, black box programer.) I'm just curious because your opinion is opposite to most on this blog.
Thanks

by josh on October 27, 2008 8:07 PM

Ray,

What are the pilot stocks for this?

Thanks,

Steve

by steve on October 28, 2008 8:54 AM

JT, Steve -- Here is the list of stocks for the first phase.

The list will be updated as more stocks are added. Please note, those are the stocks in which:
-- We will accept reserve orders with no displayed amount;
-- Specialists will become DMMs; that is, they will be able to trade on parity, with no advance "look" at incoming orders.

In the second phase, probably two or three weeks away, we will implement the Capital Commitment Schedule, which involves the DMMs pre-programming their actions directly into the Display Book (again, with no "look").

More info to come. Thanks for writing.

by Ray Pellecchia on October 28, 2008 9:16 AM

Brad -- Here is the rule filing that lists the qualifications to become an SLP, and spells out the calculations. Thanks for writing.

by Ray Pellecchia on October 28, 2008 9:25 AM

Josh,

As long as this debate stays respectful and professional I don't mind a good challenge! You may be right, but in what ways do you personally feel my views may differ from "the rest"? Ndaq, Cme and Ice have all electronic platforms! Please look at their gross margin and net profit margins. All much better than NYX. Also, please see the Market Share statistics for NYX over the last 2 years! They are horrendous! To just keep it on this point, the all electronic platforms are increasing market share, dont forget about BATS, and have much much better profit margins! Do I believe HUMANS help, of course, but their role really needs a HUGE change, which they are trying to do. What i believe is NYX only has 6months to 1 year to accomplish this or risk becoming the #2 or #3 exchange in the world very quickly!(CME has a greater market cap and ndaq is fastly approaching) BATS is also growing very quickly. Look at the spread of Market Caps between NYX and Ndaq over the last 2 years! It has shrunk incredibly in Ndaq's favor and after NYX completes its buyback, Ndaq can actually have a higher Market Cap than NYX! NYX is slow, has been losing Marketshare qtr after qtr for 2 years, losing listings to domestic and international exchanges and so on... Look at Arca..Fully electronic and has been growing at a good pace continously. Oct. 31st, funny day to pick earnings. Will it be a trick or treat? Right now im thinking it will be a trick like the past 7 QTRS...

by Mark T. on October 28, 2008 9:58 AM

By the way, NYX and NDAQ should merge!!! With all the domestic and global competition it SHOULD be approved!!

by Mark T. on October 28, 2008 10:20 AM

Mark T, You still didnt answer Josh's question. Do you trade stocks? Black Box, etc.. Iam curious. Thanks

by tony dey on October 28, 2008 11:28 AM

In general almost all traders i talk to prefer trading stocks on the NYSE rather then Nasdaq. Most of the Black Box programers/Operators prefer running their algos on Nasdaq. As far as a business model i feel that the NYSE had a great niche a few years back with thier specialist/Auction model but tried to be all things to everyone and wound up sub par in that attempt. IMO they would do much better with the original foundation and some changes in order to create a true "Hybrid" system. I think they realize this now and we will see a much more improved version shortly. If this does happen i expect market share to dramatically increase. They already own ARCA so why not really improve the auction/Hybrid aspect to bring the traders/volume back to the exchange. Thanks ray.

by tony dey on October 28, 2008 5:28 PM

Tony Dey,

No I am not a professional trader and Never claim to be one. I am an individual investor who tries to do the best I can...whatever that is worth! :0)

Mark T.

by Mark T. on October 28, 2008 7:29 PM

Tony Dey,

"I expect market share to dramatically increase". This is a quote I took from your post above!

I don't feel Market Share will dramatically increase anytime soon! Nasdaq and BATS have been taking it faster than we can ever gain it back. These so called "new rules" are supposed to be ground breaking and innovative...Until increased market share factual statistics are actually reported, to me this is just another PR Relations / Poor business attempt to increase market share that will fail. I am still on the side of going fully electronic until proven wrong by facts, not press releases, rule changes or whatever traders and management try to say! When it is reported that NYX now trades 50% of its own listed stocks, THEN I will say congratulations! Also, combine that with profit margins (which should be at least 24%) if NYX is actually a technology company as Duncan mentioned many many months ago...

by Mark T. on October 29, 2008 7:01 AM

Mark T.

If you are not a professional trader, but instead an "individual investor" how can you make those comments. When you trade 100 shares through your little web broker, you will see little difference between market centers. It is transparent to you. Professional traders have many things to consider when they need to get the job done. The NYSE many have some of the right answers with their new market model. Time will tell.

by Scott M. on October 29, 2008 8:22 AM

Ray--What's the feedback from the traders, programmers, fund managers,etc. so far?

by icann on October 30, 2008 8:27 PM

Mark--You are right, it's a trick again. Doesn't look like that there is any hope out there.

by icann on October 31, 2008 6:01 AM

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