NYSE chief defends specialist trading

Market-maker system gets best prices for shareholders, he says

February 19, 2004|By NEW YORK TIMES NEWS SERVICE

NEW YORK - The chief executive of the New York Stock Exchange defended its market makers and its 211-year-old trading model yesterday, arguing that the changes he has put in place over the past month should be sufficient to appease the Big Board's critics.

The remarks of the exchange's chief, John A. Thain, came just two days before he is scheduled to testify before a congressional panel on the viability of the exchange's trading system, which relies on a network of specialist traders to guide investors to the best possible price for a stock.

"The specialist system gets better prices," he said yesterday. "If you want the best price, you are likely to get that on the NYSE."

Keeping them profitable

While he declined to comment on the $240 million settlement this week by the exchange's top five specialist firms and the Securities and Exchange Commission over trading abuses, he did say that he was concerned about the profitability of the firms.

"There are only seven left," he said. "I want them to be viable and survive."

Thain's testimony comes at a crucial time for the exchange. Next week, the SEC is expected to decide to amend or perhaps even abolish one of its long-standing rules to ensure investors receive the best price for a stock, regardless of which exchange it is traded on.

Called the trade-through rule, it has become a lightning rod of sorts for the exchange's critics who contend that it is an outdated provision that serves only to protect the monopoly of the specialists by directing order flow to the Big Board and away from its electronic competitors.

Thain defended the rule as a necessary guarantee to the best-execution principle, which states that investors are owed the best price for a stock.

He warned that eliminating the rule would cause several broker-dealers and institutional investors to take their trades off the public market system, to their own benefit and the detriment of investors.

"The risk is that if they abolish the trade-through rule, there would be more internalization," Thain said. "Those firms with large retail networks will benefit, along with big investors, too."

Speedier trades

Thain said that changes he has made to the exchange's electronic trading system, which will make it more attractive for investors interested in speed and anonymity, put the exchange on an even level with its electronic counterparts.

As a result, he said, with the exchange now likely to be classified as a fast market, akin to its electronic competitors, there is no need to abolish the trade-through rule.

"We will give institutional investors the ability to transact just as quickly and with the same anonymity as other exchanges," Thain said. "If you have equivalent speed, you shouldn't allow investors to opt out of the trade-through rule."

Thain said he was not expecting the SEC to abolish the rule, but he said it was likely that it would be changed.

One change being considered by the commission is a modification that would allow traders to trade through a superior price for a stock, as long as the difference in price did not exceed 2 or 3 cents.

Wants Reed to stay

On the still-unanswered question as to who is to succeed John S. Reed as chairman, Thain acknowledged to reporters that there had not been a large number of candidates lobbying for the job.

While Reed has been adamant in saying that he has no interest in making himself a permanent chairman, Thain acknowledged that he had asked Reed to remove the interim from his title.

"I've had discussions with John asking him to stay on," Thain said. "And he has said no. It's an on-going discussion."

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