Monday, December 13, 2004

WSJ article, SEC, and obsolescence of floor broker/specialists

On 12/09/2004, Wall Street Journal reporters Kate Kelly and Deborah Solomon published a story titled, "New SEC Rules Create Winners (and Losers)." A highlight of this article is the following:

"Some say the SEC plan could in effect eliminate the need for NYSE floor brokers and diminish the role of the specialists who oversee its stock auctions, because so much trading would be electronic. Many floor brokers and specialists have NYSE ownership stakes, so how they fare could influence the Big Board's opinion.

Moreover, floor brokers and specialists profit off market-moving bid-and-offer information they glean from their privileged posts, but the SEC proposal would pressure the NYSE to make more of such data public. Under the current system, markets only have to publicize their best prices. In the new system, they would publicize all bids and offers if they want other markets to send orders their way. Publicizing all bids and offers would allow institutional investors to fill huge orders quickly, scooping up, say, 100,000 shares of a company at $40 for 30,000 shares, $40.01 for 50,000 and $40.03 for 20,000.

Big Board executives have told the SEC they may sometimes opt out of the new system to preserve the NYSE's 212-year-old auction system, SEC officials say. That could be an empty threat, because doing so would let rivals ignore its bids and offers."

The authors also discuss the potential impact that Regulation NMS has on the Nasdaq, Arca, and Instinet. They say that since currently no "trade through" (read: shop for best price) rule exists for the Nasdaq, most of Nasdaq orders are filled within Nasdaq. The authors explain that often " "better prices are on rival electronic-trading sites, mostly ArcaEx and Instinet." (Note: interestingly enough when you read this article on the aforementioned quote contains a link to Instinet (INGP) stock information. No such link is available for their scribing of ArcaEx - an indication of just how unknown AX is on Wall Street (as of this writing).

Finally, another takeaway from this article is this concept, ". . .But there is a significant flipside: Nasdaq and other electronic markets stand to gain ground in the trading of NYSE and Amex stocks." ArcaEx has grown market share in both AMEX and NYSE sequentially (quarter/quarter) and year/year. Schmendricks like Lehman and Jeffries have demonstrated via recent comments and downgraded that they're focused on Nasdaq market share and are clearly not focused on where the puck is headed. Do a search of this site for "market share" to read about the potential growth for ArcaEx.


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