Wednesday, February 28, 2007

Market of Markets

As Phase IV of Hybrid rolls out and NMS goes into effect next week, it's interesting to flashback to 1998 when the Nasdaq and American Stock Exchanges attempted to merge.

It's interesting to read the quote from the former-CEO of Amex , Richard Syron in the link above. (Incidentally, Mr. Syron now runs Freddie Mac, and Frank Zarb is now a Managing Director and Senior Advisor with private equity firm, Hellman & Friedman). Nasdaq and Amex desired the ability to add value by offering traders a choice of electronic trading or floor-based trading. Here is a Washington Post piece from 1998 that discusses the desire for a hybrid model.

In 1998, NYSE's largest competitors tried to put together what the NYSE has now done successfully. (If you'd like to learn much more about Hybrid, please checkout the NYSE's Hybrid Talk blog).

It's interesting to think about how much things have changed since the roaring 90's. Safe to say that in 1998 it was hard to imagine that the NASD would eventually merge its regulatory arm with the NYSE's SRO, or that the NASD would spin-off the Nasdaq (which it founded in 1971). Also, in 1998, it would've been hard to predict that the NYSE would beat all other exchanges to a Hybrid model, and that it would do so by merging its centuries-old open outcry system, with Archipelago Holdings' sophisticated and revolutionary, ArcaEx.

The NYSE has done it, and this is no small accomplishment.

And, as for fears that yesterday's sell-off (what looks on a chart like a cliff in Aculpolco) was related to Hybrid, consider what Louis Pastina, executive vice president for market development at the NYSE, said about the NYSE's operational issues.

According to a Dow Jones Newswire piece today by Gaston Ceron:

"...Pastina pointed to recent moves of human trading personnel on the trading floor, which affected the way that the NYSE's systems were set up. And while the NYSE had made adjustments for the moves, they weren't enough to properly handle the trading surge that was seen as the Dow Jones Industrial Average suddenly plunged about 200 points around 3 p.m. Tuesday - a problem caused by a computer glitch at Dow Jones & Co. (DJ), the company behind the DJIA and also the publisher of this newswire...

...Pastina said the problems didn't lie with the Hybrid Market's electronic component itself, but with other NYSE systems. "We needed to rebalance the allocation of capacity. We did it last night," he said Wednesday. More work will be done, such as additional testing. "We'll add capacity and disk space where appropriate."

...The knee-jerk reaction by the increasingly electronic trading community to the drop made matters worse, Pastina said. "This was a big trigger," he said. "The computers all kicked off at the same time." For the NYSE, the results were delays. "We wound up queuing," Pastina said."

(Source: Gaston Ceron, Dow Jones Newswire 2/28/07).

Tuesday, February 27, 2007

JP's at it again

Enough's been said about JP Morgan's view on NYX. One could see today's blurb from Worthington (the JPM forecaster that covers NYX) about the locked up shares coming from a mile away (scroll down on this page and see the 5th paragraph under 1-23-07's posting here at NYSE ArcaNews titled "Hybrid's in Place" post below).

Remarkably, nothing about Worthington's insight points to anything fundamentally related to the operations of NYX. One day, an forecaster will consider the accretive value that Euronext will add to NYX's operations (and vica versa). That sort of fundamental impact is what ultimatly tips weighing machines.

Tuesday, February 13, 2007

NYSE Having Options

While so much media focus seems to center around the equities trading marketplace, there is a quickly growing segment of the capital markets space that necessitates some attention -- that's the options marketplace.
Options are a stock deriviative that trade in a unique area of ExchangeLand and require special permission for investors to use (in the way of signed agreements indicating that the investor has an adequate degree of knowledge of options and margin trading). A few fundamental differences between stocks and options are touched on below.
Like the stock marketplace, options markets have made extraordinary advances over the last couple of years. At the heart of these advances was Archipelago Holdings acquisiton of the Pacific Stock Exchange (pictured above; read about that here).
This stroke of management genious and foresight enabled Archipelago to become the first stock exchange to offer electronic trading for both stocks and options.Though Hybrid gets much attention, the ArcaEx platform for trading options is absolutely a world-class system that offers tremendous benefits. While analysts and pop media rags focus on stock volume ebbs and flows between NYSE and (primarily) NDAQ, there are dramatic developments occuring for NYX in the options section of ExchangeLand, and though NYSE ArcaNews is only a little pocket of the world-wide-super-information-highway-web which is incredibly amateur, NYSE ArcaNews feels obligated to expose this exciting options area.
To be sure the rules between trading options and stocks differ significantly. For one thing, today, options typically trade in nickel increments (compared to stocks that typically trade at penny increments). This means that spreads in options are not nearly as tight as they are in stocks. It also means there is a heck of a lot of money left on the table for market makers to benefit from. Arca was a pioneer as it lead the way tightening the nickel spread to pennies. (You can read about this story from July 2005 here).
Also, rules set forth by Regulation NMS do not exactly apply to options trading (this is what a Wall Street analyst that covers NYX recently told me last Friday). Think college football rules and NFL football rules. The rules are quite similiar in many ways, but their subtle differences make the games exciting in their own ways.
As NYX evolves and continues to execute its entrepenuerial/landscape changing vision, the derivitiave area is an exciting one to watch. With the Euronext merger (and Liffe), NYX will continue to offer best-in-class technology and liquidity, and will likely develop additional products in this section of ExchangeLand, as it brings these services to a market on a global scale. The only way to expand this scope would be to link to the Hubble Space Station and somehow offer a benefit for doing so -- safe to say, that's not on the radar.

Developments in this area of NYX are occuring regularly. This is yet another competitive difference between NYX and other bourses in the landscape. Just yesterday, FlexTrade Systems, a big player in the multi-asset algorithmic execution management systems arena, announced that its clients will now have direct access to NYSE Arca Options. FlexTrade's CEO hints towards the quality of NYSE Arca Options as he said,"It's a perfect fit for us," said Vijay Kedia, president and CEO of FlexTrade Systems. "NYSE Arca Options speed and transparency not only enhances the ability of FlexOPT [FlexTrade's brand name for one of their systems], but its competitive price structure creates the ideal trading situation for our clients."

This should translate to order flow and increased NYSE ArcaEx Options volume. Since NDAQ doesn't have a 1:1 competitor for this volume, odds are the WSJ won't print many stories about the volume ebbs and flows here. However, Dow Jones Newswires issues this report this morning:

NYSE Arca Traded 531,442 Electronic Contracts Feb. 9
NYSE Arca Options, the electronic options marketplace at NYSE Group Inc. (NYX), traded 531,442 contracts Feb. 9, surpassing the 467,477 contracts traded Jan. 19, the company said.
The trading also marked a 45% increase over January's average daily electronic volume of 380,142, the NYSE said. The marketplace was launched in October.

Monday, February 12, 2007

To Herr is Human

This morning's post is not so much about the failed NDAQ bid for LSE, but about how ridiculous the The Wall Street Journal and KBW analyst Richard Herr were with their insight towards this headlining event.

On February 10, 2007, the WSJ ran an article by Alistair MacDonald with the headline, "With Nasdaq-LSE Deal Doubtful, Exchanges' Steps Are Unclear." In this piece, the Journal goes to long-time, get-it-wrong, analyst Richard Herr for insight.

The article reads, "...Just this past week, giving Nasdaq some last hope, the LSE's share price had fallen closer to the bid, suggesting that the result isn't certain. Richard Herr, an analyst from brokerage Keefe, Bruyette & Woods, said Friday that there was a 30% chance Nasdaq could get the votes for a majority stake in LSE Saturday..."

For NDAQ to be successful in their bid, they needed 50% of LSE shareholders to vote in favor of their deal. In the end, NDAQ received acceptances worth just 0.41 percent of the exchange's ordinary shares in return for its bid (click here for more on this).

Let's consider Herr's analysis. Among the first questions that come to mind is what model is Herr using that gives him this sort of information? The next question is, what other pieces of truly valuable, statistically-based information does Herr come up with when he publishes his research? These questions lead to the question of accuracy. How inaccurate is he/has he been regarding his high profile analysis of companies in ExchangeLand?

To get a sense of the last question above, just take a peak around the archives here at NYSE ArcaNews to learn how incredibly inaccurate Herr has been about NYX.

What will happen next with NDAQ will be interesting to watch. To be sure, there's no shortage of prognosticating among the popular media. One of the more interesting ideas centers around the idea that Project Torqouise is looking for a technology partner. It's well-known that SuperMontage and other NDAQ technological initiatives are not best in class, and it's become clear through the years that NDAQ can't get a multi-national strategy done right.

Similiarly, watching LSE attempt to stay relevant as NYSE EuroNext becomes an even stronger force to be reckoned with will be interesting to watch.

These NDAQ stories certainly make for entertaining fodder in between the real, landscape changing technological advancement and multi-national deals that NYX continues to execute.

Tuesday, February 06, 2007

American Eagle Joins the Leaders

Today's news that American Eagle Outfitters is delisting from NDAQ to list on the Big Board is another win for NYX. What makes this win particularly interesting is that when RHT did the same thing a short while back, their departure caused a hole in the QQQQ ("Cubes" if you're cool) ETF.

This hole was plugged by replacing (then 4-letter ticker) RHAT with AEOS (soon to be 3-letter ticker). This departure from Nasdaq creates another vacancy in the Cubes.

Also, HP's stroke of management genius to drop its Nasdaq listing and list solely on NYSE is yet another reflection of leading companies with visionary managers making decisions that help their shareholders (lower listing fees), and traders (best in class/world trading platform).

Here's a link to the NYSE ArcaNews story from 12-12-06 about the RHT move.
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