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CNBC's Gasparino: NYSE May Alter Rules to Save Floor Trader Jobs

For the New York Stock Exchange, smaller is actually better--at least if its going to save the jobs of floor traders.

CNBC has obtained a copy of a new NYSE plan to actually shrink the amount of floor space that traders and specialists use to make markets in stocks. Instead, part of the floor will be open to other types of trading that is currently prohibited.

If the rule is approved by the Securities and Exchange Commission, floor brokers and specialists will be able to use part of the floor to trade for their own accounts, people with knowledge of the plan say. At the moment, proprietary trading is outlawed on any area designated officially as the NYSE's floor, and that includes the five trading rooms where most of the activity takes place as well as lounge areas.

The official designation of the floor dates back to the mid 1960s. Regulators worried that traders would use their status as market makers -- matching buyers and sellers of stock -- and their access to valuable information flows to profit for themselves, when they're supposed to be serving the needs of investors.

But those days are changing. The floor trader no longer is at the center of the information flow, the NYSE argues in its filing. In fact, nearly 90% of all trading at the exchange occurs electronically, and over the past year, trading volume through the floor has declined by 49%.

The move comes as floor trading operations are losing money. LaBranche, the largest independent specialist firm, recently announced a $5.6 million loss for its first quarter. CNBC has reported that many specialist firms are threatening to leave the exchange, and the current management of the NYSE is trying to convince the SEC to approve rules that would make it more profitable to remain on the floor.

The reason for the losses can be traced to the NYSE's decision under CEO John Thain to implement more electronic trading, which many large investors believe is faster and cheaper than the specialist/floor trader system that existed for most of the NYSE's long history.

But there was a distinct downside to the move toward electronic trading that goes beyond the declining profitablity of the floor trader: As more and more of the traders go out of business, the exchange is loosing a valuable marketing symbol. For better or worse, the floor trader is an integral part of the NYSE's brand, and without warm bodies on the floor of the exchange, there will be little to distinguish the NYSE from its computerized competition, the Nasdaq.

Still many on the floor doubt whether anything can save the floor at this point. "The question is whether firms can continue to stay in business to allow this rule to take affect," one executive at a major specialist firm told CNBC.