UPDATE 1-NYSE proposes new floor trading rules

(Adds details on chronology, quote from NYSE, analyst quote)

NEW YORK, June 13 (Reuters) - The New York Stock Exchange, a unit of NYSE Euronext Inc (NYX.N), has proposed a series of rules that would transform how specialist traders operate on the exchange's floor amid increased electronic trading.

The proposal, filed on Thursday with the U.S. Securities Exchange Commission, would grant specialists, who ensure an orderly market and dampen volatility, new privileges but fewer advantages in how they trade.

Currently, specialists typically handle 10 percent of trading volume, a figure that can rise to 20 percent to 30 percent when trading in a given stock becomes volatile and investors seek human intervention. NYSE is one of the few remaining exchanges to use the floor traders, while its competitors have largely gone entirely electronic.

"We've got fragmentation and faster markets," said Todd Abrahall, NYSE's vice president of specialist liaison and market development, forcing the exchange to update its model.

Specialists ensure an orderly market by stepping in with their own liquidity when needed, and by trading against trends when the market gets volatile. These obligations would remain under the new guidelines.

The new roles would end the use of NYSE's "hybrid model," launched in 2006, which automatically executes orders while allowing specialists to interact with NYSE's electronic order book and maintaining the floor auction system.

The specialists would be renamed "designated market makers" and gain new rights, such as the right to trade in options and other derivative securities for risk management purposes. A firm's specialists would also be permitted to have more access to technology and experts from other parts of their firm, subject to strict information barriers.

They would also be able to tap into the capital of their parent firm to make trades.

But specialists would no longer be allowed to see electronic orders prior to being publicly displayed, called "advance look" in industry parlance.

NYSE, which first informed the SEC of its preliminary plans nine months ago and says it has buy in from specialists, hopes to deploy the new system by late summer.

Abrahall said the exchange will gauge the success of the new "designated market maker" in part by how the exchange's market share evolves.

In the past few years, the exchange has seen its share of trading of NYSE-listed stocks tumble to around 45 percent.

"They are trying to retrofit what may already be gone," said Sang Lee, an analyst with Aite Group, a Boston-based consultancy. "Clients are not willing to pay more for the benefits specialist floor trading brings."

In recent years, the number of specialist firms on the NYSE has dwindled to six, with about 250 specialists working the floor. Last year, the exchange closed two of its four trading rooms.

In May, NYSE Euronext Chief Executive Duncan Niederauer said the exchange's floor population could fall by another 15 percent to 20 percent by year's end.

Still, he said, he has no intention of closing the trading floor, calling it an important part of the exchange's branding and saying human intervention is still needed in volatile markets. (Reporting by Phil Wahba; editing by Jeffrey Benkoe, Leslie Gevirtz) (phil.wahba@thomsonreuters.com; + 1 646 223 6128)