October 14, 2003

Fidelity Investments Wants Stock Exchange Reform

Fidelity Investments wants to see the end of the New York Stock Exchange "Specialist": from the Wall Street Journal:

WSJ.com - Fidelity Urges NYSE to Revamp Trading Operation: ...Fidelity Investments, in a rare public assault on the New York Stock Exchange, called for an end to the human-based system for auctioning stocks that has been the pride of the Big Board for more than two centuries. Scott DeSano, head of global equity trading at the nation's largest mutual-fund company, attacked the exchange's specialist system, in which floor traders match buyers and sellers. Instead, he said, Fidelity would prefer an electronic system such as that used by the Nasdaq Stock Market, in which computers pair buy and sell orders with no human go-between. "That's where we inevitably want it to get," Mr. DeSano said in an interview Monday.

Closely held Fidelity, controlled by Boston's billionaire Johnson family, tends to like to work behind the scenes, although Mr. DeSano has long made his frustration with the specialist system known in trading circles, as well as at an SEC forum last November. Fidelity complains that specialists trade for their own accounts at the expense of investors. But now, Fidelity is ratcheting up the pressure, following last month's ouster of NYSE Chairman Dick Grasso in the wake of disclosures of his $187.5 million retirement-pay package. Although the post-Grasso Big Board has said it is pondering a number of reforms, including changes to its trading system, Fidelity executives worry that outrage over compensation may end up overshadowing broader concern about how the exchange operates.

The NYSE is the only major stock market in the world that uses an auction system. In such a system, specialists are assigned to provide liquidity, or a ready market, in specific stocks. Each specialist firm oversees assigned stocks, matching buy and sell orders from investors. When buyers and sellers can't agree on a price, specialists are required to step in with their own capital to buy or sell shares to facilitate trading...

Posted by DeLong at October 14, 2003 06:28 AM | TrackBack

Comments

Automate and eliminate jobs. Increase productivity.

Posted by: bakho on October 14, 2003 07:05 AM

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What Bakko said.
Funny, I always felt as a retail investor that I got much fairer execution on the Big Board then on Nasdaq. But, I am retail. Imagine a place where the same rules apply to ALL investors. Its called the NY Stock Exchange. I guess Fidelity likes the advantages that Nasdaq offers it.

Posted by: ectron on October 14, 2003 07:40 AM

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Why would you believe execution is fairer for individuals on the NYSE than on Nasdaq?

Specialists are clearly extracting a fair amount of rent for their activities. Those higher costs are borne by buyers and sellers.

>>When buyers and sellers can't agree on a price, specialists are required to step in with their own capital to buy or sell shares to facilitate trading>>

Anyone have any info on the exact rules for when a specialist must step in? From what I can tell, their obligations are less than meets the eye.

Posted by: richard on October 14, 2003 10:06 AM

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"Why would you believe execution is fairer for individuals on the NYSE than on Nasdaq?

Specialists are clearly extracting a fair amount of rent for their activities. Those higher costs are borne by buyers and sellers."

There has to be a market maker of some sort to assure liquidity, and the market maker has to be compensated. Is the specialist system more or less efficient than the NASDAQ broker-dealer set-up? Surely someone has addressed this. Does anyone know the research?

Posted by: Bernard Yomtov on October 14, 2003 10:24 AM

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Is Fidelity part of NASDAQ?

Anyway, its NASDAQ that was caught cheating and not the specialists at NYSE. See Christie and Schultz (1994) Journal of Finance.

Posted by: Rob on October 14, 2003 12:31 PM

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Why should someone be required to step in an handhold, and "provide liquidity". They dont in the shoe market, or the fish and chip market, because lack of trading is itself an important market signal ; it says that divergent opinions exist and that these opinions are held quite strongly.

Let the market sort it out, I say. And if that means everyone is quite happy with what they own at the last price, and no trading occours, then so be it.

Ian Whitchurch, who is making his living in occasionally illiquid Australian junior oilers

Posted by: Ian WHitchurch on October 14, 2003 04:10 PM

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'Why should someone be required to step in an handhold, and "provide liquidity"?'

The basic reason--though this is a gadfly's opinion--is that the market works better when it's kept liquid.

Posted by: Randolph Fritz on October 14, 2003 09:01 PM

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Think of market specialists as bookies. They take bets as they come in instead of waiting to match one betting for with one betting against. And if the bets move more in one direction the bookie changes the line (or the price).

Posted by: Rob on October 14, 2003 09:40 PM

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the exact rule for "when the specialist steps in" is when the CEO of AIG calls grasso and whines that the assigned specialist isn't buying enough AIG stock. this story was out about two weeks ago, check it out-its a beaut!

Posted by: self on October 14, 2003 11:42 PM

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Nice!

Posted by: milf on December 18, 2003 12:59 PM

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