Exchange Wars: Snafu Pits NYSE vs. Nasdaq

The Big Board and its electronic rival trade barbs a day after a trading halt in three stocks.
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Thursday's multihour trading halt for three stocks on the

New York Stock Exchange

has revived the long-running "man vs. machine" debate and exposed animosity between the Big Board and its all-electronic competitor the




reported Thursday, a premarket trade originating from

Fidelity Investments

earlier in the day was transmitted incorrectly by


(C) - Get Report

Lava unit, triggering a multihour NYSE trading halt for shares of


(T) - Get Report






(JEF) - Get Report


The halt and effort to reopen trading for the stocks prompted a frantic scene on the floor of the exchange, which is often sleepy these days as more trading is being done electronically. But the real drama occurred off market -- literally and figuratively -- as the Nasdaq was later forced to break, or cancel, nearly an hour's worth of trades in Wyeth that occurred in all-electronic platforms prior the Big Board's halt.

The NYSE, in a written statement Thursday, credited floor specialists with catching the error and halting trading. A day later, the competing exchanges are pointing fingers at each other.

"Positioning this incident as a positive for the specialists is like a doctor making a patient sick then touting they have found a cure," says Nasdaq spokeswoman Bethany Sherman. "Specialists created the problem. They began posting incorrect opening indications at 9:26 a.m. and they continued to post incorrect prices through 9:56 a.m. Over 25 minutes later, the Exchange halted the stock for news pending."

Predictably, the NYSE disputed the Nasdaq's characterization.

"The specialists and our systems operated as they should in identifying the erroneous orders, posting indications, and halting and opening trading in the affected stocks to ensure fair and orderly markets," says NYSE spokesman Rich Adamonis.

NYSE officials were clearly not happy about Thursday's prolonged trading halts; Jefferies shares didn't open until 11:05 a.m. EDT, followed by AT&T at 11:28 a.m. and Wyeth at 12:34 p.m., according to


. But the Big Board ultimately trumpeted what transpired as a victory for the floor's hybrid system, which integrates the traditional human-based auction system with computer-driven electronic trading.

Unofficial comments heard at the Big Board included, "Man over machine" and "this is what you get for non-NYSE execution" -- a reference to off-market trades which occurred in the stocks. Most notably, Wyeth continued to trade prior to the NYSE halt and the Nasdaq's subsequent canceling of orders. Other electronic marketplaces, such as the

Intercontinental Exchange

(ICE) - Get Report

, canceled trades on the same terms.

Essentially, the Nasdaq's perspective is that it was forced to cancel, or "break," all trades in Wyeth executed between 9:30 a.m. EDT and 10:25 a.m. at or above $58.55, because those trades were based on erroneous prices emanating from the NYSE, where the N.J.-based pharmaceutical firm's shares are listed.

A Wyeth spokesman did not return calls seeking comment about the NYSE halt or the Nasdaq's canceling of trades, which raised the ire of some traders.

On Thursday, I reported on a hedge fund manager who had shorted Wyeth into its early spike in electronic markets and felt it was unfair for the Nasdaq to cancel trades based not on technical errors but concurrent rumors that Wyeth was going to be acquired by


(PFE) - Get Report


Another source, who also requested anonymity, described traders shorting Wyeth stock in electronic markets at above $60 and then hedging those bets with long trades at $58. The problem is the $58 trade stood, but the short sales above $60 were canceled. When Wyeth ultimately opened a little above $57, traders were sitting on a loss on shares bought at $58.

"If both sides of the trade would have been canceled -- fine," the source says. "But the cutoff level

of $58.55 left some people disadvantaged."

Fate of the Fabled Floor

The back story behind Friday's tit-for-tat is the heated competition for listings between the exchanges, as well as their philosophical differences about the benefits of Nasdaq's all-electronic platform vs. the NYSE's hybrid system -- the Big Board's attempt to drag its human-based auction system into the modern era.

Electronic trading, decimalization and the fragmentation of trade execution are contributing to a growing belief that human traders are heading into the dustbin of modernization, much like horse and buggy drivers of a century ago and travel agents in more recent times.

Electronic trading's combination of anonymity and rapid execution is a big reason human assistance has been dwindling since the NYSE accelerated adoption of the so-called hybrid platform beginning earlier this year. As a result, floor brokers now handle less than 20% of the Big Board's daily volume, down from 86% in early 2006.

In addition, Bernstein & Co. recently shuttered its floor broker operation, and specialist firms such as




Van Der Moolen


have been laying off employees in rising numbers. Specialists' ranks have declined more than 30% since last year, according to

The Wall Street Journal


"With the New York Stock Exchange's move to a hybrid market, the earnings capacity of specialist firms has been hurt dramatically,"

Bear Stearns


Chief Financial Officer Samuel Molinaro recently said, after his firm took a $225 million charge to reduce the value of its floor-trading operation.

But as with most sensationalistic headlines, reports of traders' deaths may be exaggerated.

"The floor is not going away. OK?," Duncan Neiderauer, president and co-CEO and head of U.S. Cash Markets, said at

NYSE Euronext's


recent analyst day, according to a

transcript at the NYSE Web site. "If I'm hearing the customers properly, they do not want us to be Nasdaq. They do not want another super-fast video game with no price improvement and high volatility. What they want is a market that's fast when they need it to be fast, but also can discover prices for blocks when that's called for."

Neiderauer was unavailable Friday, as he was in a Washington, D.C., meeting with

Securities and Exchange Commission

officials. Presumably, he was there to discuss rule changes "in places where I think the pendulum has swung too far," in terms of the balance of opportunities vs. risks for NYSE specialists, as per his comments at the analyst day.

Aaron L. Task is editor at large of In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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