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A specialist watches the computer screen shortly before the closing of the bell on Monday. Buyers and sellers at the New York Stock Exchange are increasingly finding each other electronically and closing deals in milliseconds.NYSE floor trading fate is in hands of technology
Its merger with an electronic exchange addresses increased rivalry with Nasdaq.
The NYSE has traded stocks on the floor nearly the same way for about 213 years.
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NEW YORK -- The New York Stock Exchange's planned merger with an all-electronic exchange raises many questions for the humans involved in stock trading -- not just the hundreds of people who work the NYSE floor, but also the investors who buy and sell stock.
The way the NYSE has traded stock has gone mostly unchanged for nearly 213 years, though certainly the volume of shares and the speed of transactions has picked up considerably as computers were brought in process trades. Yet the idea is the same -- a floor trader walks up to an auctioneer, called a specialist, and places an order to buy or sell. The specialist finds someone else interested in that order and brokers a deal.
Now, those buyers and sellers are increasingly finding each other electronically and closing those deals in milliseconds. And the NYSE, facing increased competition from the Nasdaq Stock Market Inc. and other electronic markets, has embraced the technology with the merger with Chicago-based Archipelago Holdings Inc. that would also turn the currently not-for-profit NYSE into a publicly traded company called NYSE Group Inc.
The deal announced Wednesday was widely praised as a way to deal with a number of problems at the exchange, including the growing discontent of seat holders, or owners, who felt the NYSE wasn't doing enough to make their investment worthwhile. The merger also addresses competition with all-electronic markets, gives the NYSE equity with which to make more deals and puts it on a level playing field with other global equity markets such as the London Stock Exchange and Germany's Deutsche Bourse.
But in answering many of the outstanding questions about the NYSE's future, Chief Executive John Thain raised new ones regarding the exchange's world-famous trading floor, and whether investors will see any changes, for better or worse.
In announcing the merger, Thain said there were "absolutely no" plans to do away with floor trading. Indeed, the NYSE will continue to explore trading options, futures, exchange-traded funds and other derivative investments alongside its equities -- and some of those derivatives could come from Archipelago, which has been making inroads in options trading, by the time the deal closes late this year or early in 2006.
But while the NYSE could take some derivative business from ArcaEx, the electronic trading platform could rob the floor system of trading volume -- and that could have an impact on prices as well as the people who work there.
Within the specialist system, floor traders and specialists need a certain amount of critical mass in the number of shares traded in order to keep prices from becoming too volatile. If buyers and sellers are automatically matched via computer, then maintaining an orderly market in a stock becomes more difficult, since the real people on the floor of the NYSE will have fewer shares to work with.
For the most part, prices on all-electronic markets aren't too much more volatile than on the NYSE. But when there's exceptionally good or bad news about a given stock -- or a general sell-off or buying spree -- an electronically traded stock tends to be far more volatile than a stock managed by humans.
And it's that kind of price security that may make the floor traders and specialists a selling point for the combined NYSE Group, especially in competition with all-electronic markets such as the Nasdaq and many global exchanges.
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