Chapter 24 Specialists NYSE Structure 1366 members specialists
Chapter 24 Specialists
NYSE Structure Ø 1366 members (specialists & floor brokers) Ø Seat = Member = Right to buy & sell on the NYSE Floor Ø Approximately 3000 listed companies
Specialists Ø 7 specialist firms Ø Approximately 450 specialists Ø Typically 5 to 10 years on-the-job training Ø Handle equities across all industries Ø Most individual specialists handle between 3 and 10 stocks
Stocks Ø Each stock assigned to one firm Ø Stocks allocated one of two ways: • Allocation interviews n 3 -5 Specialist firms participate in 30 minute interviews ¨ Either • by phone or in person Assigned by NYSE Allocation Committee Ø Each stock trades at one location on floor
Specialists’ affirmative obligations Specialists are traders of last resort. • Have to quote firm two-sided markets during trading hours. Ø Specialists have an obligation to smooth prices by intervening to prevent large price reversals (provide price continuity). • Expensive if informed traders in the market. • Profitable if the spread is wide because other traders are distracted. Ø
Exchanges regularly evaluate specialists based on the width of their quotes, the depth at their quotes, and price continuity. Ø Specialists provides • Liquidity when there are order imbalances • Price continuity • Limit order display • Supposedly stabilize prices Ø
Specialists also do… Ø Ø Ø Specialists also work orders entrusted to them by floor brokers. Specialists generally charge brokers commissions for these services. Specialists act as oral bulletin boards for brokers. Specialists have a responsibility to make sure that all traders follow the exchange rules. • Conduct an orderly market.
Specialists’ negative obligations Abide by order precedence rules, including public order precedence rule. Ø Public liquidity preservation principle is typically enforced at primary exchanges. • Specialists can trade only with incoming marketable orders. Ø Third market dealers and regional specialists are generally not subject to the public liquidity preservation principle. Ø
Specialist privileges Ø Specialists can engage in: • Speculative trading on their own account based on their ability to predict short-term price changes • Quote-matching (see p. 249) • Cream-skimming - observe broker IDs for incoming market orders and step in front of the book by improving the price • Strategies to take advantage of stop orders
Specialists control the quotes • Limit display to top-of-file – most valuable • Constrained by order exposure rules Ø Specialists can stop incoming marketable orders. Ø Specialists conduct the open. Ø Specialists receive brokerage commissions for system orders. Ø Specialists have a unique information advantage that they can use to generate dealer profits. Ø
Specialist Profitability: A Challenging Environment Seat Prices Down 40% from highs Ø Current return on Specialist Capital near zero Ø
NYSE Seat Sales December 2000 - Present
Top Line Revenue Pressure
Specialist Return On Capital
Recent Controversy Ø Ø Issues surrounding former NYSE CEO Dick Grasso and SEC’s specialist investigation occur simultaneously Results: Reputation decline for NYSE • Decline in market share • Dual listing on NASDAQ of 7 stocks • Dramatic decrease in NASDAQ transfers • Ø Despite these issues, NYSE still capturing bulk of IPO volume
Chapter 25 Internalization, Preferencing, and Crossing Discuss JFE paper
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