Specialists Running Off Trading Floor? NYSE Will Survive

The floor of the NYSE is buzzing with nervousness and excitement. Specialist firm Van der Moolen has announced they are exiting the business; rumors that other big specialist firms will exit are rampant. Is this it? Will the fabled NYSE floor survive?

The answer is likely yes, because new blood is about to come in. Sources at the NYSE say they are talking to five or six outside firms that have expressed interest in coming into the Exchange.

Who would be interested? People who are aggressive traders who have experience with algorithmic trading and spend a lot of money on technology. Who fits that bill? Names that are mentioned include UBS,Renaissance,Citadel, Knight Trading, Citigroup, and even smaller shops like Getco and Alston.

Why a firm like Citi? They recently bought Automated Trading Desk (ATD), which trades millions of shares daily by exploiting minute inefficiencies in stocks and futures markets.

How long before a decision is made on will take over Van der Moolen's book? My sources tell me it could be as early as next week. Expect changes, starting with the word "specialist." NYSE's incoming CEO, Duncan Niederauer, told Reuters today he saw specialists evolving into "integrated market makers." What's that?

Right now, for example, specialists have certain affirmative obligations--specifically, to provide liquidity for stocks to ensure orderly trading. In the past, this has required them to commit capital on the other side of trades--they buy when everyone is selling, sell when everyone is buying. That kind of obligation is likely to change.

Another likely change: capital requirements. Specialist firms are required to commit huge amounts of capital--in the hundreds of millions in some cases--in order to trade, requirements far beyond other businesses. That is likely to change as well.

The game: make it more attractive for specialists, er, integrated market makers--to stay in the business. Stay tuned.

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