NYSE Tweaks Rules for Big Traders

The New York Stock Exchange said Thursday that it has found no evidence that its largest customers are being hurt by decimal trading, but the exchange is introducing two rule changes designed to reduce any appearance of impropriety.

The amendments, which should have little effect on individual investors, are designed to make it easier to buy and sell large blocks of stock, which usually exceed 25,000 shares.

Some of the exchange’s biggest customers, like mutual fund companies, have complained that specialists are using decimal pricing to make it more difficult and expensive to fill large stock orders.

“The perception is that this is happening, and while the data does not support that it is, we think it is best to address it,” said Richard Grasso, NYSE chairman and chief executive, citing the exchange’s preliminary findings.

The NYSE converted to a decimal-pricing system early this year as part of a government mandate. Previously stocks traded in increments of one-sixteenth of a dollar, or 6.25 cents, but now prices are expressed in penny increments. The Nasdaq Stock Market has also switched to decimals.

Specialists are the brokers who match buyers and sellers of specific stocks on the floor of the NYSE.

The new rules are designed to keep specialists from cutting ahead of public orders by making offers that are a penny more than the existing bid, otherwise known as “pennying.”

The first rule change limits a specialist’s ability to become involved in a stock transaction when the would-be seller and buyer are represented by the same broker.

The second rule change gives special priority to transactions of more than 100,000 shares, by allowing brokers more flexibility to complete a deal and by restricting a competing bidder’s ability to break up the transaction. The goal is to make it easier to get a big trade done at a single price.

The NYSE plans to ask the Securities and Exchange Commission to make the first change permanent, while the second proposal will operate as a six-month trial.

Representatives of the Specialists Assn., the industry group that represents specialists, did not return telephone calls seeking comment, but Grasso said the rule changes have strong specialist support.

Still, at least one fund is taking a wait-and-see approach.

“I remain skeptical as to whether they can arrive at a practical solution,” said Kevin Connellan, director of equity trading at Northern Trust, a Chicago-based firm that handles more than $350 billion in assets. “I see this affecting my business every day.”