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NYSE Chaos Takes Bite Out of LaBranche

The shares shed nearly 10% on concerns about the future of specialists.

A weekend of news stories predicting dramatic change in the way the

New York Stock Exchange

does business led to a selloff Monday in the shares of




The Big Board's largest publicly traded specialist firm shed $1.76, or 9.9%, to $16.05 a share. Investors bailed because of fear the NYSE may be forced to revamp the way it has traded stocks for much of its 211-year history.

Big Board critics, as they have on a number of occasions, are once again predicting the decline of the specialist firm, now that Richard Grasso is gone as chairman after the scandal over his $139.5 million payday. The

Securities and Exchange Commission

also is stepping up the pressure on the Big Board by taking a closer look at the trading activities of some specialist firms.

Grasso was a strong defender of the specialists against the encroachment of more modern electronic trading systems. But with Grasso gone and many clamoring for major changes in the way the Big Board operates, there's a fear that the specialists -- the heart-and-guts of the NYSE's floor-based trading system -- may be in for their biggest challenge yet.

"There's a realization that regardless of whether or not you think

specialists are a good value, you have a lot more uncertainty,'' said Charlotte Chamberlain, a Jefferies & Co. analyst, who has had a hold rating on shares of LaBranche for several months. "Regulatory risk is not predictable.''

Specialist firms like LaBranche are granted an exclusive franchise by the Big Board to oversee trading in some 2,800 listed stocks. They play a big role in setting prices for stocks, because all buy and sell orders executed on the NYSE pass through them. Each specialist controls the trading in a given stock.

Specialists earn a commission from each trade they complete. But the firms make most of their profit from trading stocks for their own benefit. Specialists are not supposed to take advantage of their customers when they make proprietary trades, but critics long have contended that specialist firms have a built-in advantage since they know how everyone else trades in a given stock.

Critics also contend the specialist system is slower and not as cost-efficient as newer electronic trading systems such as

TheStreet Recommends





. In recent years, Archipelago, Instinet and other so-called electronic communications networks have stolen nearly 50% of the trading activity in


stocks away from the Nasdaq Stock Market. (Archipelago, which began as an electronic communications network, became a stock exchange in 2001.)

But ECNs remain bit players in executing trades in NYSE stocks because of Big Board rules that make it difficult for competitors to steal market share away from the specialists. That's the case, even though computer-powered ECNs can often match buy and sell orders in a fraction of the time it takes the specialist firms.

The other big specialist firms are

Goldman Sachs'

(GS) - Get Goldman Sachs Group, Inc. Report

Spear Leeds & Kellogg,

Van Der Moolen Specialists



Bear Wagner


Performance Specialist Group


Susquehanna Specialists

. (

Bear Stearns

is a partner in Bear Wagner.)

The irony is that last week, many on Wall Street saw Grasso's forced departure as a victory of sorts for LaBranche. The NYSE recently censured LaBranche for failing to turn over thousands of emails as part of an ongoing investigation into allegations of improper trading activities at some specialist firms. Indeed, Michael LaBranche, chairman of the specialist firm, was one of the first Wall Street executives to call for Grasso's resignation last week.

Robert Gasser, chief executive officer for



, a provider of electronic trading technology, said it's way too soon to predict the demise of the specialist system. But Gasser said he could see the SEC and other regulators imposing rules that limit the franchise of the specialists and open doors to alternative trading systems. "They will lose market share and we may see fewer specialists."