Big Board's Hybrid Gamble

NYSE's foray into electronic trading is set to debut despite continued criticism.
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New York Stock Exchange

is getting set to launch its much-talked-about hybrid market, but critics still question why the Big Board isn't skipping right to a completely electronic platform.

The NYSE, which is operated by the

NYSE Group


, has been losing ground as other electronic exchanges, such as the



and even the

International Securities Exchange


, have been able to provide not only faster trades but more competitive pricing electronically.

Under the direction of CEO John Thain, the Big Board has been feverishly working to catch up. The move to a hybrid market is Thain's attempt to appease shareholders who are hungry for a lightning-quick trading system to boost market share, as well as the specialists -- trading firms such as



-- that have long ruled the exchange's storied floor.

But some say Thain's hybrid market is nothing more than a stopgap measure to appease the specialists, who have seen their profit margins eroded as trades in listed stocks have gone to rival platforms. They say it's only a matter of time before the Big Board breaks with its past and transitions the vast majority of trading activity onto the Archipelago platform -- the all-electronic exchange the NYSE merged with in March.

More recently, the exchange offered $10.2 billion to purchase the Paris-based exchange Euronext NV in June.

Since the Archipelago deal closed, "we've been questioning, why continue along the development path," of the hybrid market, says Richard Herr, an analyst at Keefe, Bruyette & Woods. The hybrid market is a "one step along the way to electronic trading."

Herr points to the liquidity rebates the NYSE recently offered to customers as an incentive to use the Archipelago system rather than floor trading. "They're trying to steer the order flow towards Archipelago and away from the floor," he says.

NYSE says the move to a hybrid market -- a dual platform that will boast both automated electronic trades and old-fashioned floor trading -- will offer customers more choices. The Big Board says the hybrid model enables customers to trade instantaneously "with certainty and anonymity, without sacrificing the price improvement and market quality" of the auction market.

Jamie Selway, a managing director at White Cap Trading and a former Archipelago executive, says the electronic platform is a "must-have" system for the Big Board in order to compete effectively.

"You can't run an exchange business exclusively floor-based in 2006," Selway says. "They've done what they needed to get done, via the Arca deal and the coming hybrid launch. Now the question is, what's their value proposition above and beyond trading?"

Selway was one of many brokers and specialists who attended a mock trading session on Saturday that the NYSE held in order to fine-tune the platform. During the session, about 6 billion shares were traded, compared with the normal 1.4 billion trades in a day.

The NYSE plans to roll out two listed securities on the new platform on Friday, but it would not say which stocks they were. It plans to complete the process by December.

A spokesman for the NYSE did not comment.

Thomas S. Caldwell, chairman of Caldwell Financial and a NYSE shareholder, says the NYSE's dual platform has its advantages.

"We have the cachet," Caldwell says. "I think we will add market depth to those companies on a fairly regular basis, and I think we will have the systems to be able to culminate significant volumes."

In addition, "there will always be a role for the specialists," he says. "Maybe not in the



of the world but in the whole raft of other companies, you're going to have gaps in liquidity at any given moment."

But analysts still don't seem convinced.

NYSE has got "too many people they're trying to please," says Michael Vinciquerra, an analyst in Atlanta at Raymond James. "I'm not sure it's going to give them a competitive advantage and not sure how involved the specialists are going to be. The Nasdaq would seem to have the advantage of speed of their system and their aggressive pricing."