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Chapter 24 Specialists. NYSE Structure. 1366 members (specialists & floor brokers) Seat = Member = Right to buy & sell on the NYSE Floor Approximately 3000 listed companies. Specialists. 7 specialist firms Approximately 450 specialists Typically 5 to 10 years on-the-job training

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slide1
Chapter 24

Specialists

nyse structure
NYSE Structure
  • 1366 members (specialists & floor brokers)
  • Seat = Member = Right to buy & sell on the NYSE Floor
  • Approximately 3000 listed companies
specialists
Specialists
  • 7 specialist firms
  • Approximately 450 specialists
  • Typically 5 to 10 years on-the-job training
  • Handle equities across all industries
  • Most individual specialists handle between 3 and 10 stocks
stocks
Stocks
  • Each stock assigned to one firm
  • Stocks allocated one of two ways:
    • Allocation interviews
      • 3-5 Specialist firms participate in 30 minute interviews
        • Either by phone or in person
    • Assigned by NYSE Allocation Committee
  • Each stock trades at one location on floor
specialists affirmative obligations
Specialists’ affirmative obligations
  • Specialists are traders of last resort.
    • Have to quote firm two-sided markets during trading hours.
  • 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.
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Exchanges regularly evaluate specialists based on the width of their quotes, the depth at their quotes, and price continuity.
  • Specialists provides
    • Liquidity when there are order imbalances
    • Price continuity
    • Limit order display
    • Supposedly stabilize prices
specialists also do
Specialists also do…
  • 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
Specialists’ negative obligations
  • Abide by order precedence rules, including public order precedence rule.
  • Public liquidity preservation principle is typically enforced at primary exchanges.
    • Specialists can trade only with incoming marketable orders.
  • Third market dealers and regional specialists are generally not subject to the public liquidity preservation principle.
specialist privileges
Specialist privileges
  • 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
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Specialists control the quotes
    • Limit display to top-of-file – most valuable
    • Constrained by order exposure rules
  • Specialists can stop incoming marketable orders.
  • Specialists conduct the open.
  • Specialists receive brokerage commissions for system orders.
  • Specialists have a unique information advantage that they can use to generate dealer profits.
specialist profitability a challenging environment
Specialist Profitability: A Challenging Environment
  • Seat Prices Down 40% from highs
  • Current return on Specialist Capital near zero
recent controversy
Recent Controversy
  • 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
  • Despite these issues, NYSE still capturing bulk of IPO volume
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Chapter 25

Internalization, Preferencing, and Crossing

Discuss JFE paper

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