• Nov
  • 21
  • 2008
  • 9:29 AM

Institutional Investor Magazine: 'Up Off The Floor'

By: Ray Pellecchia
File Under: NYSE

If you're interested in what's going on from a competititve standpoint at the New York Stock Exchange and at parent NYSE Euronext, quit reading this stupid blog and pick up the November issue of Institutional Investor, which has two articles you might want to see. Note, both of these links are subscription-only:

1) Up Off The Floor, which looks at the impact to date of the new changes in the NYSE trading model. Excerpt:

After two centuries of dominance, the exchange was steadily losing ground, surrendering crucial market share to electronic rivals; a decade ago, according to Edward Ditmire, a stock analyst at Fox-Pitt Kelton, 80 percent of the daily trades in shares issued by companies listed on the NYSE were executed at NYSE. In October that figure was 42.8 percent. The good news, though, is that NYSE Euro­next gained share in September, reversing a year-long slide. The market share for October was up from 41.9 percent in September, which was up slightly from 41.4 percent in August. ­That’s still well below the 59.8 percent it logged at the end of 2007, but at least the decline has been reversed. Exchange officials are encouraged to think that in a time of extreme stress traders are turning to them. “This difficult environment is giving us a chance to prove our value to all our clients,” says Lawrence Leibowitz, head of U.S. execution and global ­technology.

Further, exchange officials say that overall numbers reflect even greater strength during the most critical periods of the day, when prices are set. “We are now transacting the lion’s share of the trading business during the open and closing hours of the market, because we are able to handle those volumes at a time when other markets seem too nervous to quote in size,” [CEO Duncan] Niederauer ­says.

Adds the managing director of trading operations at one bulge-­bracket firm: “Sometimes it feels as if the stock exchange is the ­only place that I can count on to act the way it’s supposed to.”

Niederauer still faces difficult challenges. The core business is under assault by digital technology, deregulation and globalization, and the company needs to find new sources of revenue and growth. “There ­aren’t many companies that have ever gone through such a massive transformation. The problem they face today is that they have to take all the raw material they have and make it work properly,” says ­Ditmire.

I can't vouch for those market-share numbers; they sound to me like NYSE and NYSE Arca combined rather than NYSE stand-alone. I do see that the NYSE Trading Floor is participating more, reversing a long trend of decline. The rollout of our changes is still in progress and I'm cautiously optimistic about the impact, but I also want to note that as I've said before, what we're doing is not a panacea for everything that ails today's fragmented, hyper-competitive, highly automated, penny-increment markets.

2) Trading Costs Are Rising is based on Elkins/McSherry's annual survey of all-in trading costs at markets and firms around the world. For at least the third consecutive year, the survey finds that NYSE-listed stocks have the lowest trading costs of any in the world. Excerpt:

The NYSE, the flagship of multinational giant NYSE Euronext, now trades a minority of its own listed shares, as the liquidity has shifted to the Nasdaq and alternative venues, but the NYSE has done its part to push institutional trading efficiency. Handling more than 500 million shares a day in blocks of 10,000 or more, the NYSE is “still the largest block destination on the Street, but we ­don’t always get ­credit for that,” says Joseph Mecane, the Big Board’s executive vice president and chief administrative officer for U.S. markets. Stealing some of that thunder are block-­execution specialists like Fox River, Liquidnet and Pipeline Trading Systems, all ranking high in Elkins/McSherry’s brokerage league tables in terms of bettering ­global benchmark averages.

Not only are NYSE-listed stocks cheapest to trade, but the cost continues to decline, year after year:
2008: 13.89 basis points
2007: 14.80
2006: 17.51
2005: 23.26
2004: 25.87

Happy Friday, folks. A morning injection of historical trivia: how many of you were around for the following?

Today in NYSE History (NYSE.com)
21 Nov. 1983 -- The stocks of the seven "Baby Bell" companies - spun-off in the AT&T divestiture - began trading, adding 1.5 billion shares to the list in a single day.

Comments

Ray,

NYSE Euronext traded exactly 3x as many shares as the Nasdaq OMX today(11/21/08). Do you think this has anything to do with the VERY recent changes that the NYSE has made? Usually the NYSE trades 2.4 - 2.6x as nasdaq.

by Mark T. on November 21, 2008 5:55 PM

Mark -- Thanks for asking, but sorry, I don't have any analysis on that issue.

by Ray Pellecchia on November 21, 2008 6:46 PM

Yes Ray, I remember the T spin-off. It was the beginning of a short rally that led to a major decline in AT&T's stock price. That was a time when shorting T was considered by some as anti-Amercian.

by Bart Ward on November 23, 2008 3:48 PM

ray,

hi, are any of the slp's in place yet? and is there or will there be a published roll out list?

thanks

j

by jt on November 24, 2008 11:28 AM

JT -- One Supplemental Liquidity Provider is live now. Another four or five are on the runway, in various stages of getting the approvals and making the system changes to participate. My understanding is that we won't publish a rollout list, as there is nothing different that customers need to do in connection with the introduction of SLPs. But I'll keep you posted on any news I get on that front.

Thanks as always for writing, JT.

by Ray Pellecchia on November 24, 2008 1:31 PM

Today, 11/24/08, NYSE traded approx 3.03x the amount of shares Nasdaq did. This is above average over the last couple of weeks, compared to the 2.4x - 2.7x NYSE usually trades above Nasdaq. I hope this trend can continue and maybe the very recent changes NYSE has made has already started to have an effect! Gaining back marketshare right now is huge to prepare for the return of the bullmarket in 2010!

by Mark T. on November 24, 2008 4:26 PM

I'm sitting here listening to another politician on cnbc talk about how the sec needs to bring back the uptick rule. Every time I hear this on the news it makes me laugh. These people act like they know how the markets work. They act like nothing has changed to the way the markets run. I would love for things to go back to the way they were before decimilization and reg nms and then put back the uptick rule. But thats just not going to happen. If someone wants to believe that the uptick rule is important thats fine, but please understand that it would not have the same effect it did for decades. The way the markets trade have changed, and not for the better. At least not yet. Still hoping.

by josh on November 25, 2008 8:02 AM

Josh -- Thanks for your perspective. I too am wondering how the uptick rule would or wouldn't work in today's environment, or how the concept would have to be adapted.

Mark -- Just curious, I'm trying to understand what numbers you're using. Are you looking at composite NYSE volume (trading in all markets in NYSE-listed stocks) or just volume traded on NYSE? Thanks.

by Ray Pellecchia on November 25, 2008 9:00 AM

Hey Ray,
Thanks for the response! I am using NYSE Listed Volume, which is shown on the website under the NYSE tab and the number I use for nasdaq is what they post on their home page. Since listed volume is trading is all markets for NYSE listed stocks, can you possibly direct me to a better way to analyze executed volume on the NYSE vs. executed volume on Nasdaq??? Thanks a lot!

by Mark T. on November 25, 2008 11:30 AM

hey ray, thanks for the response... it seems like those responding to the blog are always negative about the changes NYSE mgmt has been making(myself DEF included, haha). My question is...Does anyone you come in contact like the way stocks trade now? Has anyone in the business said wow, the NYSE really hit a homerun with these change? The questions i pose are not meant to be tongue in cheek...i am TRULY wondering if anyone likes the way NYSE trades stock...or if its just someone that EVERYONE is just gonna have to deal with...Thank you again.

j

by jt on November 25, 2008 11:32 AM

and i do think an uptick rule would def not be a cure all, but would help a little...for this reason... the spreads on thin (and thick for that matter) are at huge levels...40-50 cents at times. If there was a least an uptick rule it might prevent lifting an offer 60 cents higher and then turning around and smacking a bid 80 cents lower. Might prevent some of the hyper-volatility you see on the open, close, news, etc. this would obviously be more impactful on stocks with tiny floats than those with millions of shares outstanding...just an idea.

j

by jt on November 25, 2008 11:39 AM

Mark T. - the volumes you see on NYSE and NASDAQ are total compositive volume for companies listed on each exchange. This doesn't represent the amount of volume that each exchange transacts during the day. Here are a couple of sites that serves as a good proxy for market share numbers:

http://www.batstrading.com/market_volume.php
http://www.nasdaqtrader.com/

by Alan on November 25, 2008 3:40 PM

Mark -- To cite a disinterested third party, I would recommend the market-by-market volume breakdown that the Wall Street Journal publishes daily. You can find it in the Money & Investing section, usually deep inside with the statistical highlights (and lowlights) of the previous day's equities trading.

by Ray Pellecchia on November 25, 2008 6:52 PM

Ray,

Finally got a chance to read the articles - Great stuff!!! Thanks for sharing - but I am still going to read your blog.

by Fields on November 25, 2008 11:14 PM

Ray,

Why doesn't the NYSE Euronext post its own market statistics instead of posting Listed volume? Wouldn't it make 100% logical sense if the NYSE Euronext posted this information on its own website for all investors and interested parties to decipher and evaluate? The only reason I can see why it is not posted is because the NYSE wants to keep this information private for internal reasons. If it is posted, "everyone" can have a factual idea of the NYSE Market share/execution on a daily basis

by Mark T. on November 26, 2008 12:18 PM

Fields -- Good to hear from you. And thanks for reading!

Mark -- Thanks for the suggestion. I think we should post both NYSE composite volume and NYSE-traded volume.

JT -- I mentioned your question to a colleague who speaks with sell-side trading desks all the time, as well as with buy-side traders. The reaction she's heard from these traders has been extremely positive. These customers are seeing NYSE far more frequently at the National Best Bid or Offer; they're seeing tighter quotes; they like that we're increasing our system speed and capacity; they like the idea of greater human interaction at the close when the market is very volatile; and they're seeing our share of trading tick upward.

You're right, you don't see these comments sent to the blog. Upstairs traders have told me they read the blog but never write in; to do so they have to go through a time-consuming compliance check, and it's just not worth their time.

But on occasion, you do get a glimpse of the sentiment. Richard Rosenblatt, head of the eponymous agency firm that trades both upstairs and on the NYSE Trading Floor, said on a conference call his firm held last week, "The new model is most encouraging, creative, and aggressive move by the exchange to get it right in years.”

And in the Institutional Investor article linked above, there's this quote: "Adds the managing director of trading operations at one bulge-­bracket firm: 'Sometimes it feels as if the stock exchange is the ­only place that I can count on to act the way it’s supposed to.'”

by Ray Pellecchia on November 26, 2008 1:44 PM

Ray, I know for a fact that many of the guys/gals on the floor and even upstairs read your blog daily. In general, they agree with us JT, JOSH, DT, and some of the others. I think the changes that we seek will be good for them as well. At least thats what i have been told. IMO your blog has been the best change so far as the Hybrid era is concerned. Thanks, have a good Thanksgiving my friend.

by tony dey on November 26, 2008 5:38 PM

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