After sailing against the winds of change while other exchanges were busy adopting electronic trading, the New York Stock Exchange has opened the door to the digital age. Last month, the exchange implemented the third stage of its hybrid system, which combines electronic and floor trading.
As most of the liquid stocks are now being traded electronically, analysts say this might be the beginning of the end for NYSE’s iconic trading floor. Of course, these predictions are not new.
“Most of us have been predicting the demise of floor trading,” says Sang Lee, managing partner at Aite Group, a research and advisory firm. “I personally have done so for years. When it happens, it will be anticlimactic.”
Comments like these will not go down well with traders on the floor. Much of the resistance towards electronic trading has been attributed to their influence. But pressure to comply with Reg NMS, which requires best pricing and fast quotation, and the increasing pressure from other bourses and trading platforms, made change inevitable. In addition, their influence is diminished since the exchange became a public company. Shareholders will be keen to turn around the declining market share.
The hybrid system incorporates floor traders. Some analysts are sceptical about the approach. “We are believers in technology,” says David Easthope, analyst at Celent, a research and consulting firm focusing on the application of financial information technology. “It would have made sense to go straight to the electronic model.” It is hard not to see the system as a halfway house on the way to a purely electronic system, which was created out of reluctance to abandon floor trading. “The NYSE has put both floor and electronic trading out there – and it’s letting the market decide which way it’s going to go,” says Lee. “The indications are that it will be veering towards electronic trading.”
But specialists are workaholics, and some features of the hybrid system seem designed to keep them busy. At certain price levels, known as liquidity refreshment points, the hybrid market will revert to a non-automated market. The idea is to reduce volatility. Not everyone is convinced about the strategy, especially as other fully electronic markets are able to operate without such a provision. “Is this artificially creating demand? Some observers would say so, and I am one of them,” remarks Lee.
While the large stocks have gone electronic, specialists still provide a valuable service for small and mid-cap listings. So there is work for them, at least for now. And in the long term? Some market observers reckon the very idea of the hybrid system is suspect. “In my view, in the long run the two systems cannot work together. Other markets have shown that,” says Easthope, pointing to exchanges such as the London Stock Exchange, which abandoned floor trading in 1987.