NYSE Is Set for Electronic-Trading Expansion

By AARON LUCCHETTI
October 5, 2006; Page C1

In many places, you can get a pizza delivered in about half an hour. Imagine getting it in three minutes.

The difference gives a sense of how much faster investors will be able to trade many of the world's largest companies on the New York Stock Exchange in coming months.

Starting tomorrow, the NYSE Group Inc. unit is expected to launch expanded electronic trading in two stocks -- American Express Co. and Equity Office Properties Trust -- and will follow with hundreds more in the next few weeks. Under the long-anticipated rules, orders sent to the NYSE will take less than a second to execute, down from an average of nine seconds, exchange officials say.

The changes will allow investors to trade much more quickly, and potentially more cheaply. It may lead to more volatile trading. And it almost certainly portends difficult times for floor traders.

To many buy-and-hold investors, the speedier delivery may not register as anything more than a slight service upgrade. To mutual funds and pension funds representing individual investors, hedge-fund managers, Wall Street trading desks and other frequent traders, faster trading of NYSE-listed companies will open the floodgates to new ways of investing in some of the world's most important companies.

When the changes are complete, brokerages acting on investors' behalf will be able to buy and sell shares of NYSE-listed stocks electronically in bundles as large as one million shares, up from 1,099 before. Big investors will be able to get trades done more quickly, encouraging them to trade more. Individuals will have access to potentially better prices and faster execution of their orders because of the greater trading volume.

By December, nearly all the Big Board's 2,700 listed issues -- from General Electric Co. to General Mills Inc. and General Motors Corp. -- are expected to feature the electronic enhancements.

"The NYSE will be more attractive now," says Dan Mathisson, managing director of electronic trading at Credit Suisse Group, a large customer of the Big Board. "We expect we'll do more trading there."

The new rules allow investors to trade electronically as often as they want, ending previous restrictions that limited the trades to twice a minute and to orders that included price limits.

Combining typical floor trading with new, unproven technology is a radical move for the 214-year-old exchange, which NYSE Chief Executive John Thain said last week is designed to give "immediate electronic access" for investors.

In many ways the Big Board's hand was forced. Mutual-fund and pension-fund managers called on the Big Board for years to allow more electronic trading, saying the NYSE's floor system was too slow and expensive. Securities and Exchange Commission rules scheduled to go into effect in 2007 will essentially require electronic trading at exchanges.

A cadre of rapid traders at hedge funds and elsewhere pushed the issue by sending their electronic orders to competitors of NYSE, such as Nasdaq Stock Market Inc. and Archipelago Holdings Inc., which NYSE bought this year.

Investors still will be able to send orders to the exchange's Lower Manhattan floor. There, jacket-clad brokers buy and sell for clients by raising their arms in a crowd at opportune moments. The NYSE is offering floor brokers new electronic programs to conduct trades on hand-held computers, while continuing to provide some advantages to trading on the exchange floor. These include giving the floor broker more anonymity and flexibility than someone trading away from the floor.

Even with the new rules, the NYSE's system won't always be electronic. When any stock's price makes a big move in a short period, the NYSE will automatically switch off its electronic capabilities for a few seconds so expert traders known as "specialists" can use the old-fashioned auction process to reset the stock's price. The exchange hopes the practice will lower volatility in share prices, though many expect increased volatility overall when the NYSE becomes more electronic.

Some say the moves will severely curtail floor trading. At the London Stock Exchange, expanded electronic trading in 1986 became known as the "Big Bang," when floor traders left the exchange completely a few weeks later.

Big Board officials say a similar situation is unlikely in New York. For one thing, they note, major Chicago derivatives exchanges have continued to keep busy floors while handling a growing flow of electronic trades. The NYSE also has a vested interest in keeping the floor vibrant because companies pay the exchange higher listing fees in part because of the prestige of the historic floor. Floor traders also can help investors deal in trickier-to-trade stocks that attract relatively few buyers and sellers.

Still, the NYSE is competing with faster, potentially cheaper outlets. While NYSE traders may prosper, they may not necessarily work on the exchange floor. "The business has changed dramatically," says Michael LaBranche, chief executive of LaBranche & Co., the largest independent specialist company. Floor personnel at the stock exchanges represent about a third of the company's employees, down from about 75% five years ago.

Rosenblatt Securities, a brokerage, has cut its floor personnel by 40% in recent years, all while handling more trading volume.

LaBranche in recent weeks has laid off about 30 floor staffers, and Van der Moolen Holdings' Van der Moolen Specialists USA also laid off traders. Remaining traders likely will handle up to 10 times more stocks, since computers can handle more routine trading, says Michael J. Rutigliano, director of floor trading at brokerage WJB Capital Group, Inc.