New York Stock Exchange Chairman Richard A. Grasso said in a speech here today that the nation's biggest stock market will build an electronic trading system to handle small orders, which for the first time will let customers skirt the venerable trading floor to place orders.
Grasso, long criticized by regulators and brokers as being slow to respond to technological shifts, conceded that technology has transformed the way the world buys and sells stocks. "Your marketplace sees itself in need of reinvention," he told hundreds of attendees at the annual Securities Industry Association meeting here.
The exchange decision was motivated, he said, by a major shift in the profile of customers, new competition from overseas and the public's intense focus on stocks.
The Big Board also has faced new competition from electronic networks, known as ECNs, that match buy and sell orders automatically, though at the moment ECNs handle mostly Nasdaq stocks.
During the next three to six months, Grasso said, the exchange will develop what is essentially an electronic stock market that will handle orders of 1,000 shares or less.
The exchange will create an Internet-based order book that would allow direct execution of orders by investors trading through an NYSE member.
To cut the cost of such trades, Grasso said he will increase to five minutes the "window" for providing commission-free transactions on those orders delivered electronically. Previously, orders that took up to two minutes were free. More than half the Big Board volume is handled electronically now--and 85 percent to 90 percent of those shares are traded within five minutes, making them free of the commissions of floor traders, known as specialists, who maintain orderly markets in specific stocks.
That exclusive role gave NYSE specialist firms about $137 million in profits in the second quarter. But David Humphreville, a co-executive director of the Specialists Association, which represents 26 firms, said the group supports the plan. "There's been pressure on brokers' commissions industry-wide," he said.
Indeed, that issue was at the center of an earlier speech here by John "Launny" Steffens, a vice chairman at Merrill Lynch & Co. Noting a new study by Steve Galbraith at Sanford C. Bernstein & Co. that predicts the demise of commissions, he said Merrill is trying to reshape itself to become more than just a conduit for stocks.
There are now more than 100 online brokers. Charles Schwab & Co. co-chief executive David S. Pottruck predicted that ultimately there will be just three. "There are no more full-commission firms--or there will be none shortly," he said. "Firms will not be able to continue to offer the full attention of a registered representative [stock broker]. . . . Welcome to the world of HMO pricing."
Nearly $10 billion worth of transactions take place through Schwab's Web site every week--five times more than in mid-1998.
"In the old days when it got hectic, you might have to add some phone lines, buy some more pens," Pottruck said. "Now, we've got IBM flying in huge mainframes like the kind AOL uses to install in our systems so we can keep up with the 3 million online customers we have."