The shuttering of two more specialist firms on the floor of the
New York Stock Exchange
last week has spurred heightened speculation on the trading floor about the next to go.
The decisions to call it quits last week by
Van der Moolen
, a unit of Susquehanna International Group, is indicative of the more than 200-year-old NYSE's transition to more electronic-based trading, which began more than a year ago under
CEO John Thain.
But now, as Thain leaves the post he's held for more than three years to take the top job at
, his successor Duncan Niederauer acknowledges that the NYSE's so-called hybrid market -- which entails both electronic and auction-style stock trading -- is "still in need of adjusting."
Speculation has been rampant on the exchange floor and in trading offices that either
Bank of America
or Bear Wagner, a unit of
-- or both -- will be the next to leave the trading floor.
"Hybrid Version 1 has been great," Niederauer, who is the current president and COO of the exchange, said at Merrill Lynch's Banking and Financial Services Conference last week. "I think you will see us in 2008, probably in the first quarter, roll out what I call Version 2 of that model that will redefine the role of the specialist trader."
Specialist firms earn commissions for matching buyers and sellers on an exchange. They also make money from trades made to smooth out fluctuations in stock prices.
As NYSE Euronext moves further toward an electronic trading model and listings continue to defect -- just last week
bolted to the
-- profitability at the floor traders and specialist firms has been squeezed. NYSE has closed three of its five trading floors this year and made a host of employee reductions in order to improve efficiency.
BofA: Cuts Ahead
Bank of America and Bear Stearns both declined to comment on their future on the exchange floor. But the two banks were among the hardest hit by the credit crunch and mortgage crisis, so it shouldn't come as any surprise if the two shuttered a business that has declining -- if any -- profit margins at this point.
After Charlotte-based BofA's disastrous results last quarter in its global corporate and investment banking businesses -- the bank posted a $1.33 billion, or about 90%, decline in earnings in its global corporate and investment-banking businesses -- CEO Ken Lewis said the bank would "see where our strengths are and where they're not and act accordingly."
"We're going to look at every single business," Lewis said during a conference call to discuss the bank's financial results.
Pat Healy, president and CEO of the Issuer Advisory Group, a consulting firm that assists companies in listing on exchanges, says it's logical for BofA to consider closing its specialist business.
"If you're looking to cut your costs, you certainly have to look at operations that aren't making any money," he says.
BofA said that it plans to slash 3,000 positions. About 500 jobs have already been cut. The bank could make further cuts through closing or selling the specialist business.
Interestingly, one person among the job cuts was William Harts, BofA's head of equity strategy for its brokerage arm, Banc of America Securities. Harts also ran the specialist business and left the firm three weeks ago, according to several sources.
Harts, a former
Nasdaq Stock Market
executive who was hired by BofA full-time in May 2006 after serving as a consultant to the company, was responsible for electronic trading services strategy and product development, including algorithmic and quantitative strategies, among other things.
A BofA spokeswoman confirmed that Harts had left the company.
Bear: Business 'No Longer Viable'
Sources say that Bear Wagner could be shut down before the end of the year.
Bear Stearns said this summer that two of its internal hedge funds were essentially worthless after bets on securities backed by subprime mortgages proved bad. The brokerage ended up taking about $200 million in losses during the third quarter from the hedge fund folly.
In May, the company had perhaps telegraphed the winding down of its specialist unit when it took a $225 million writedown on the business. At the same time, it decided to buy out the two other shareholders in its Bear Wagner Specialists unit and bring the company completely under its roof.
Bear Wagner CEO Peter Murphy said at the time that while the firm has been "supportive" of the exchange's implementation of the hybrid market, "it is becoming painfully clear that the specialist system ... is rapidly approaching the point where it is no longer a viable business model."
Bear Stearns said in a statement that the company has been working closely with NYSE and the
Securities and Exchange Commission
"on a new viable business model for the specialist firms."
"We remain committed to our listed companies and our clients as we evaluate all of our options moving forward," it said in an emailed statement. "We firmly believe that the specialist role is valuable for investors and is an important component to the long-term success of the NYSE."
'The Last Hurrah'
Currently about 85% of NYSE's volume is automatically executed, Niederauer said at the Merrill conference last week. The specialists' role will transition into more of an "integrated market maker," he said.
Changes, however, are already afoot.
In announcing its decision to close its operations Thursday, Van der Moolen CEO Richard den Drijver said that the unit was unprofitable. The Dutch company said it would now instead focus on expanding its brokerage and equity trading operations in the U.S. at the Chicago Board Stock Exchange, an offshoot of the Chicago Board Options Exchange. During the third quarter, Van der Moolen acquired institutional broker Robbins & Henderson in what it calls the "cornerstone in the state of a brokerage division in the U.S."
SIG is allocating its equity specialist functions in 147 NYSE-listed stocks to Kellogg Specialist Group, according to a NYSE statement last week.
If BofA and Bear Wagner were to leave, it would leave just two other specialist firms on the floor --
Spear, Leads & Kellogg
Kellogg currently handles specialist duties for 290 NYSE-listed stocks, or 10% of the total listings. Kellogg's trading activity handles about 3% of the total NYSE-listed volume.
LaBranche handles 731 securities, while its trading activity represents approximately 27% of the total NYSE-listed volume, the exchange says.
LaBranche began a review of its strategic alternatives this summer.
Michael LaBranche, chairman, CEO and president, declined to comment on the strategic review, but said that the "cash floor business is a small piece of our business today."
"Over the last five years we moved a majority of trading off the floor" as it built out its technology, LaBranche told
. "The point of sale doesn't take place on the floor anymore. It takes place in a virtual world. The specialist business is just going to be a piece of the puzzle. It's going to be integrated into other strategies. We recognize that."
Outside observers have mixed opinions about the future of the specialist business.
"The old way of doing business is gone" for specialists, says Jim Angel, a finance professor at Georgetown University. "By becoming an integrated liquidity provider and providing algorithms integrated into the architecture of the exchange -- by doing that they can make money and add liquidity. And theoretically, if it all works, the NYSE could continue to deliver superior market quality."
Issuer Advisory Group's Healy wrote in an email to clients on Monday that "new blood on the floor of the NYSE" will replace the former specialist firms in the coming weeks.
"These firms will be very accomplished in terms of electronic/algorithmic trading," he wrote. "This is the last hurrah for the floor. If this doesn't work, it's over."