NYSE Mulls Expanding Electronic Trading

The New York Stock Exchange (search) Monday said it plans to scrap limits on electronic trading and expand computer-driven orders in a historic move seen as eroding the two-century-old dominance of its open-outcry auction system.

The proposal would create a "unique hybrid market" that maintained the traditional system of floor traders who handle orders and often improve buying and selling prices for investors.

But it would also increase the use of the exchange's swifter electronic trading platform, called "NYSE Direct+ (search)".

"We provide the deepest liquidity, the tightest spreads, the best prices on our listed stocks and the lowest execution costs," NYSE Chief Executive John Thain (search) said. "What we have not offered to a sufficient degree is speed."

The expansion of three-year-old NYSE Direct+, a relative newcomer to the 212-year old exchange and technically still a pilot program, is expected to be phased in starting in six to 12 months.

The change is subject to approval by the Securities and Exchange Commission (search). An NYSE spokesman said the move does not require a vote by NYSE members.

Currently, about 10 percent of the NYSE daily trading volume is executed electronically through the NYSE Direct+ platform. But the size of orders, typically executed in under one second, is limited to 1,099 shares. This limitation, among others, would be eliminated.

Non-electronic orders routed through to the market's floor auction system take an average of about 14 seconds, according to the Specialists Association. The specialists are elite floor traders who are assigned individual stocks that they are obligated to buy and sell so as to preserve an orderly market.

Shares in listed specialist firms fell, since the increase in electronic trading could hurt their business. LaBranche & Co. Inc. (LAB) shares fell 1.3 percent to $8.08, and Van der Moolen Holding NV's (VDM)  NYSE-listed shares fell more than 3 percent to $6.18.

"This proposal will hopefully allow us to increase our volume here, increase our market share, which will ultimately benefit the brokers," Thain told reporters at a briefing in the exchange.

The proposal has been months in the making. Institutional investors have long demanded faster transactions.

Thain said one of the key elements of the proposal is to allow the specialists to work electronically.

"I don't think it will disadvantage them in terms of their ability to make a living," he said.

"The way things are now, the institutions don't have an incentive to show their liquidity," said Roger Edelen, an expert on mutual fund trading and flows.

"Therefore you have basically a black hole market where people don't know what is going on," said Edelen, who is director of research for ReFlow, a company founded by Gordon P. Getty to provide liquidity to mutual fund companies.

"Whereas if they let the other institutions step in front of the specialists -- then it makes the large institutions more inclined to trade on the New York Stock Exchange. This will make it a more liquid, functional market for the large traders, whereas right now the specialists have an opportunity to step in."

The NYSE's specialist system is one of the last bastions of the manual auction place in the world of stock trading, said John Wheeler, vice president of domestic equity trading at American Century Investments in Kansas City, Mo.

"We are going to welcome any automation or expansion of electronic trading that the NYSE proposes," he said.

Trading on an electronic platform could eliminate layers of traders and save American Century, one of the biggest U.S. mutual fund companies, between $200 million and $250 million a year in costs, he said.

The savings are just a fraction of a penny on each dollar traded, but since American Century trades about 4 billion shares a year, or $100 billion worth of stock, the savings for fund shareholders are enormous, Wheeler said.