NYSE Specialist Firms May Need Less Capital

The New York Stock Exchange is preparing to reduce capital requirements for specialists, the floor traders who are the last line of defense in a market crash, aiming to make them more competitive.

NYSE Chief Executive John A. Thain said he expected NYSE directors today to endorse a decision to cut the minimum level of capital for specialists such as LaBranche & Co. The exchange, which twice raised the minimum since 1988, must then seek approval from the Securities and Exchange Commission.

“It’s likely it will be on the agenda and it’s likely they will approve it,” Thain said in an interview last month, referring to the NYSE directors.

Specialist firms have suffered as investors increasingly send orders electronically and slice them into 350-share blocks that are difficult to trade with profitably. The seven market makers match orders to buy and sell shares on the floor of the exchange, trade for their own accounts and are responsible for maintaining an orderly market.

The firms -- LaBranche, Spear Leeds & Kellogg, Van Der Moolen Holdings, Bear Wagner Specialists, Banc of America Specialist, SIG Specialists Inc. and Performance Specialist Group -- have also been hurt by the NYSE’s decision in 2001 to price shares in pennies. Previously, the firms could make a spread of at least 6.25 cents per share on successful trades.

They lost a combined $38 million after tax last year. In 2000, they earned $708 million.

The exchange raised capital requirements for specialists in the wake of the October 1987 stock market crash, when a presidential task force concluded that some of the firms sold shares as stocks fell. The report also found that some specialists were near collapse Oct. 20, 1987, the day after the Dow Jones industrial average fell 23%.

Since the specialists were unprofitable last year, they may be less inclined to buy stocks on the way down to limit the chaos of the next crash, said Larry Tabb, chief executive of financial services research firm Tabb Group.

“I don’t think they’ll step in the way they did in 1987,” Tabb said. “This is a huge flaw in the market structure.”

In 2004, the seven specialist firms agreed to pay $247 million to settle allegations that they profited on trades at the expense of their customers. The NYSE, the SEC and U.S. attorney’s office for the Southern District of New York are still investigating the alleged violations.

The NYSE raised capital requirements in 1988 and in 2000.

Today, a specialist firm that oversees trading in more than 5% of NYSE common stock must have on hand $4 million for each stock in the Dow and $2 million for each Standard & Poor’s 100 index company that isn’t in the Dow. They must also have $1 million for each S&P; 500 member not in the S&P; 100 and $500,000 for a common stock not in the S&P; 500.

NYSE spokesman Scott Peterson declined to comment or disclose the new minimums.