NYSE specialists' role questioned anew
NEW YORK (Reuters) - The role of specialist traders on the New York Stock Exchange floor was called further into question a day after the Big Board's electronic systems successfully handled nearly 6 billion trades as the stock market plunged.
The market dropped on Thursday on record volume amid worries of a deteriorating credit and housing market, the subprime mortgage crisis and poor earnings numbers, causing a steep sell-off.
Specialists, who are responsible for maintaining liquidity and orderly markets in assigned stocks, have found their role and ranks diminished since NYSE introduced a "hybrid" market model that increases the use of automated trading.
The exchange's trading floor, which once thronged with shouting traders, especially when there were major market moves, now seems empty by comparison as hundreds of specialists have been laid off.
"The noise level isn't quite what it used to be" in the days before automated trading, Theodore Weisberg, a floor broker at Seaport Securities, said as the market fell on Thursday.
"There are fewer people, less noise, but it's more efficient," said Weisberg, pointing to his e-broker, the handheld terminal traders use to place buy-and-sell orders.
The NYSE has maintained that human intervention plays a critical role in managing order flow and detecting anomalous trading activity.
Officials from rival, all-electronic Nasdaq (NDAQ.O) maintain that markets can be run just as efficiently without human specialists. Nasdaq on Friday trumpeted that it had a record 30.4 percent share of all U.S. equity share volume amid Thursday's sell-off.
But NYSE Euronext (NYX.PA) President Duncan Niederauer has said on several occasions that the floor will shrink by half to two trading rooms by next year, but it will not disappear.
'THE HANDWRITING'S BEEN ON THE WALL'
Pat Healy, a former specialist who runs IPO consulting firm Issuer Advisory Group, said the exchange is trying to save the floor because it is tied to the NYSE brand.
"They underestimated the importance of the floor and now they realize they might need it, so they are fighting to save it," said Healy. "As the floor shrinks, the brand has risk."
But as NYSE fine-tunes its electronic systems to handle high trading and message volumes, "for people on the floor, you can tell that the handwriting's been on the wall," said Brad Bailey, an analyst at financial consultancy firm Aite Group.
He said there might be a more narrowly defined role for specialists in making markets for stocks that don't trade too often.
"If specialists can add value for different types of order flow, they will exist for as long as they can," he said.
When the stock market plunged on February 27 amid a global market sell-off, computer glitches caused trading delays and confusion on the Big Board. Traders swamped the system with messages, a capacity issue NYSE senior vice president Lou Pastina said has since been resolved.
On that day, specialists took orders by hand and jumped in to maintain order flow, but Thursday's plunge required no intervention because the electronic systems ran efficiently.
He said specialists will continue to play a vital role in policing stocks and providing information -- they recently detected erroneous trading in three NYSE-listed stocks -- although they might be trading less than before.
Yet specialists themselves don't feel the love. All seven specialist firms have reduced head count on the floor. Some, like LaBranche & Co. Inc. (LAB.N), are looking at diversifying into electronic trading tools to drive revenues.
One specialist, speaking on condition of anonymity, said the automated system handles more volume, but market quality has suffered without human intelligence.
"Specialists are not able to prevent unnecessary price movements in stocks like they used to be able to," the specialist said, adding that they don't want to leave the floor, but "it's taking care of itself."
