NYSE Clarifies Its Automation Campaign

The New York Stock Exchange is in the process of updating its systems so that trades can be executed faster. The proposal blends the existing auction system, which requires human intervention, with an automated system.

The New York Stock Exchange has filed additional information on its hybrid market with the U.S. Securities and Exchange Commission, clarifying the rules and functionality of the expanded NYSE Direct+ automatic order-execution service.

The supplemental filing details the rules governing automatic-execution orders, sweeps of the limit-order book, specialist and broker interest files and algorithms, and other features of the hybrid market such as "liquidity replenishment points"–the points at which the auction will have an opportunity to supply liquidity to dampen volatility. Also included are multiple specific examples on how orders will be handled under various trading scenarios.

"Blending the auction market with more automation reflects the exchanges commitment to our customers and further developing our market," NYSE CEO John A. Thain said. "The hybrid market provides the most compelling array of choices for trading NYSE-listed securities and will allow us to better accommodate the diverse trading strategies of our customers."

Bill Cline, head of Accentures Capital Markets practice, said, "Clearly the proposals around Direct +, especially with this clarification, go a long way toward meeting the primary concern of institutional traders, which is the lack of immediacy with NYSE trading."

NYSE Direct+ provides order execution at high speed, intended to qualify the exchange as a "fast market" under new rules that the SEC is currently contemplating. Direct+ handles more than 10 percent of the exchanges average daily volume.

AL (auction limit) orders, a new electronic order type, will allow investors to electronically place limit orders that are exposed to the market for a short period of time in order to potentially receive a price better than the best bid or ask. Customers with buy and sell orders beyond the size of the best bid or offer will have the ability to "sweep the book" or designate individual orders to trade at multiple price points subject to certain limitations.

/zimages/2/28571.gifClick here for a column denouncing the current trade-through rule for stocks.

In order to preserve the lower volatility that characterizes trading on the NYSE, sweeps will be subject to specific limits called LRPs (Liquidity Replenishment Points). When activated, LRPs automatically convert the market from electronic to auction trading for one transaction.

In the hybrid market, floor brokers will be able to electronically represent large customer buy and sell orders at the point of sale. To assist specialists with market-making responsibilities and to maintain fair and orderly markets, proprietary software will allow specialists to automatically supplement liquidity in a fast market environment.

Next Page: Renewed defense for the trade-through rule.