NYSE Under Pressure

August 25, 2006

As its trading share erodes, the NYSE works to speed the launch of its new hybrid market; plus, more from the exchange sector.

The New York Stock Exchange's (NYSE) share of trading in NYSE-listed stocks fell to an all-time low in July, at just 72.6 percent, as the Nasdaq continues to make inroads on NYSE-listed trading.  The Nasdaq's matched market share of trading in NYSE stocks topped the 10 percent barrier for the first time ever in July, rising to 10.75 percent from 8.9 percent in June.  Both figures are up substantially from year-ago levels.

According to Financial News, investors - including the hedge fund Atticus Capital, which owns nearly 9 percent of the NYSE - are concerned that the slow transition to the new hybrid trading system at the NYSE is hurting the exchange. Those concerns are in part responsible for the recent sell-off in NYSE stock (NYSE: NYX), which has fallen from an all-time high of $90.35/share in March to just $56/share today.

FN reports that the NYSE is rushing to implement its hybrid system as a result of these pressures, even as it finalizes the rules for the new trading system on the fly.  The exchange has requested - and received - waivers from the SEC allowing it to speed up testing of the system, with the goal of a full launch by October 6. The hybrid system will move the bulk of trading at the NYSE onto electronic markets, while retaining a role for specialists to add liquidity in certain situations.

Everybody Trading Everything

Meanwhile, competition in the exchange space continues to heat up, as more and more exchanges tread one another's turf.

The NYSE, for instance, finally moved into the options space on August 7, with the debut of 11 options contracts on its Archipelago platform. These listings were legacy listings from the Pacific exchange, which the NYSE acquired in its Archipelago acquisition, but the NYSE plans to expand aggressively in the options space. The exchange believes it can make significant in-roads in the market for options on individual stocks by providing investors with one platform where they can buy and sell stocks and options together.

Not to be outdone, the International Securities Exchange (ISE) - the leader in individual stock option trading - is moving aggressively onto the NYSE's turf.  The ISE has said it is on track to start operations at its own stock exchange later this year, using a proprietary trading system aimed to attract large institutional investors. The Chicago Board Options Exchange (CBOE) is also planning to launch a stock market, as the line between stock and option trading dims. 

Even the small, regional exchanges are making significant investments in an attempt to gain market share. The Chicago Stock Exchange, for instance, recently received a $20 million investment from a group of Wall Street firms to help it create an electronic trading platform, while the little-known National Stock Exchange has been partially bought out by a consortium of Wall Street firms including Credit Suisse, Knight Trading and Bear Stearns. 

It gets more and more interesting by the day...


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