NYSE to Set Up an Electronic Trading System

Under pressure from upstart computerized markets, the New York Stock Exchange plans to break with centuries of tradition by creating its own electronic trading system, Chairman Richard Grasso announced Friday.

The proposed system, approved by Big Board directors Thursday, would allow trades of 1,000 or fewer shares to be executed automatically, bypassing the “specialists”--traders on the Big Board floor who hold the franchise for dealing in specific NYSE-listed stocks.

The plan is seen by some analysts as a key step toward an eventual all-electronic market, but Grasso and other officials want to maintain at least the option for investors of using human intermediaries.

Though electronic markets can execute trades instantly, they are unable to benefit from the judgment that humans can bring to stock transactions. For example, a broker with an order in hand may sense that he can get a better price for his customer just by waiting, even for a few moments, if he senses that prices are moving in a positive direction.

The NYSE has long maintained that its system of filtering all trades through the 480 specialists provides better prices and market stability for investors.

But critics, including many of the NYSE’s member broker-dealers, are pushing the Big Board to emulate the competition--namely such quick and low-cost electronic trading networks, or ECNs, as Instinet, Island and Primex Trading, which automatically match buyers and sellers with no intermediary involved.

“Your market is in need of reinvention,” Grasso acknowledged in unveiling the proposal to the crowd of industry professionals Friday at the annual meeting of the Securities Industry Assn.

While some parts of the market still require the “high value-added” treatment that NYSE specialists provide, another part is primarily interested in “fast, low-cost execution,” Grasso said.

Some ECNs execute trades in three seconds, while the average NYSE trade takes 15 seconds.

The proposal requires the approval of the Securities and Exchange Commission, but it could well be modified before the SEC gets it, depending on the reaction from specialists--whose trade group Friday expressed general support--and other NYSE members.

Grasso said the plan is for the Big Board to create an Internet-based electronic order book that investors could access through NYSE-member brokerages. Some brokerages might choose to let their customers interact with the system directly, but that will be up to the individual brokerages, Grasso said.

The Big Board chief is feeling heat from all directions.

A day earlier, Henry Paulson, chairman and chief executive officer of Goldman, Sachs & Co., one of the NYSE’s largest and most prestigious members, called for an end to “barriers between exchanges,” including the NYSE’s Rule 390, which bars member institutions from trading NYSE-listed stocks away from the exchange.

This rule, designed to protect the Big Board’s franchise, is considered the main reason ECNs handle less than 5% of volume in NYSE stocks, while they account for as much as a third of Nasdaq stock volume.