On Quiet Floor, Brokers Say They Could Have Limited Volatility

Aug. 21, 2007 — -- It used to be that if markets were in trouble, you could tell by looking at the New York Stock Exchange trading floor. It would be a bit more packed and boisterous, with the number of trades up and the brokers all a little more on edge than usual.

That, of course, was before the advent of electronic trading.

"You used to be able to have a feel on the floor" when the economy was on the downturn, said Kevin, who for 13 years has donned the blue jacket that is the uniform for floor specialists for himself. "But now, not so much."

But with the market reeling from the collapse of the subprime market, the NYSE trading floor was mostly quiet Monday. A number of traders and specialists even had time to chat with this reporter about how the floor had changed since the dawn of "Hybrid Trading" last year.

As the traders spoke Monday, the ground around them was littered with more discarded sandwich wrappers than used trading stubs. It's a sign that new technology has rendered obsolete many of the specialists and runners, and perhaps left the remaining ones to actually have time to eat lunch.

The switch to a hybrid market, which combined the traditional floor auction market with automated electronic trading, has had its benefits. Chief among them has been an ability to handle much greater trade volume and allow more players into the trading game. Today floor traders handle less than 20 percent of shares traded each day, down from 86 percent at the start of 2006, according to the exchange.

Floor specialists "really were a bottleneck" under the old system, eroding market share and slowing down trading, NYSE CEO John Thain said at a conference last year. Last month 2.8 trillion shares were traded on the Big Board, up from 1.7 trillion in July 2006 and only 1.4 trillion in July 2005.

But there have been drawbacks, and they are most visible — and detrimental — during market crises, several brokers and specialists on the quiet trading floor said Monday. Most of the traders who talked to ABC News did so only on the condition that their real names were withheld.

If the Big Board was still run under the old auction-based system, the traders contended, we would not see as much market volatility, minimizing the stability that has characterized the market of late. Since mid-July, the market has seen giant swings, up 150 points one day, down 200 or more the next day.

Under the old system, floor traders exercised greater control over share prices. If there was a rush to sell a stock, they could moderate the price decline by not lowering the price if they knew a buy offer was coming in. By buoying the price, they could help prevent a panicked large-scale sell-off.

And the threat of rapid stock devaluations was further nipped because the slower auction system limits the number of shares that can be sold at any one time. Under the old system, stocks might fluctuate within a band of three-quarters of a point, and the several-dollar fluctuations of today were unheard of, some traders and specialists said.

Today price is set electronically and changes instantaneously, so the specialists and brokers have lost influence. In two separate interviews floor specialists called themselves "glorified day traders."

"It used to be the specialists would direct trade. Now we're not in control of the quote," a floor specialist said. "They took out the human side," he added.

And traders' diminished influence has also taken a beating on workers' morale — and their checkbook. Daniel Gallagher Jr., who has been a broker on the floor for more than 20 years, estimated that salaries have been down approximately 30 percent to 50 percent since the beginning of the decade.

"It was probably the most energetic place in the city. You used to have crowds everywhere," a 12-year veteran of the floor lamented.

Robert Colby, the deputy director of market regulation for the Securities and Exchange Commission, conceded that there was some volatility control lost when the stock exchange switched away from the traditional auction system. But Colby said that that control can be overblown.

"To a small degree there's an increase in volatility but I think it's a small degree," he said. "But if there's major moves in the market, no specialist is going to go out of business trying to fight against a price trend. They're not going to catch a falling knife."

In other words, if there is no buy offer coming in, electronic or otherwise, a floor specialist is powerless to help buoy the price of a stock.

Colby stood by the new system's ability to deliver an increased volume of trades to people globally.

"Hybrid was a response to people's desire to trade electronically. It came in the context of a set of rules that the commission adopted that allow people that trade electronically to not have to wait for a manual response," Colby said.