Changing of the Guard
The NYSE's new Chief Executive John Thain is moving quickly to increase automatic execution on the floor. Will there still be a role for specialists? Will he dismantle the auction model? How far will John Thain go?
The winds of change began blowing across the neo-classical facade of the New York Stock Exchange in December, when John Thain, the newly appointed chief executive officer, stepped before the microphones to answer the media's questions. Portrayed as an advocate of technology, it was Thain's first opportunity to hint at what course of action he would take to reform the exchange's market structure and 211-year old business-model.
But the former president and chief operating officer of Goldman Sachs - who led the investment bank's technology investments in Archipelago and other electronic-trading systems - more or less articulated respect for the exchange's current market structure, striking a balance between the old world and the future that is to come.
"My goal is to ensure that the exchange remains the world's most liquid and most efficient marketplace. That may involve a greater degree of electronic trading, but I have an open mind on this," Thain told reporters. He also spoke in favor of the specialists - the intermediaries who oversee the matching of buy and sell orders - who are at the heart of the NYSE's auction-based price-discovery process.
Two months later, during his third week on the job, the NYSE's top decision-maker told the world what he really thought, unveiling a plan to increase electronic trading, a step that could transform the way stocks are traded on the Big Board. Moving toward being "customer-sensitive," Thain wants to give big institutions the ability to execute automatically against the "inside quote" or best-bid and offer price, without going through the auction process.
On February 5, Thain won Board approval to relax restrictions on the NYSE's electronic-trading system, known as Direct+. Though it was launched in October 2000, the electronic system accounts for only seven percent of the NYSE's volume. Right now, Direct+ is good for small orders of up to 1,099 shares but a trader has to wait 30-seconds before re-entering a second order for the same customer. It's also restricted to limit orders - orders placed at a specific price.
Thain's plan is to lift the size restriction, so that larger orders can be placed. He also wants to eliminate the time parameter and allow the system to accept market orders - orders that can be executed at the current best price.
Thain also acted in response to the investigation of alleged trading violations known as front-running or penny jumping. He said he is going to change the rule so that customers will come first, before specialists trade for their own accounts.
The rule-changes, subject to approval by the Securities and Exchange Commission, are one step toward restoring investor confidence in the wake of the Grasso pay scandal and alleged specialist-trading violations. But they could be the first in a series of measures that result in a sweeping overhaul of the NYSE's market structure where humans, not machines, still play a pivotal role. And Thain seems determined to act quickly.
"I think this is something that we need to do. When you have a customer base that says we need to trade in a particular way, I think you have to be responsive to that," says the CEO.
Even though specialists and floor-brokers may see such changes as detrimental to the price-discovery process and to their livelihoods, he assured those groups they would continue to play a role. "That doesn't take away in any way from the role of the specialists, from the value of the auction market and from the role of the floor-brokers," says Thain.
But one analyst is not surprised that Thain was able to act quickly. "Changing the parameters on an existing system was a pretty easy thing for Thain to change. I'm not surprised that he was able to do it quickly. This is the proverbial low-hanging fruit for him," say Jodi Burns, analyst at Celent Communications.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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