The New York Stock Exchange last week announced a plan to expand its use of computer-based trading in an attempt to better compete against all-electronic rivals like Nasdaq Stock Market and Archipelago Holdings.
The NYSE filed a request with the U.S. Securities and Exchange Commission seeking approval for the proposed change to its operations, which would shift more transactions away from the manual auction system that now dominates the exchange's trading floor.
But the NYSE said that the expansion of its 3-year-old NYSE Direct+ order execution system likely won't start to be phased in for another 12 months or so. In addition to waiting for regulatory approval from the SEC, the exchange noted, its IT staff needs to modify the order-routing software within the Direct+ system.
Analysts who follow IT issues in the financial services industry said they think the NYSE will also have to add more systems and increase its network bandwidth to keep up with the expected increase in electronic trading volumes.
Direct+ offers subsecond trade-processing speeds, said NYSE spokesman Raymond Pellecchia. In comparison, it takes an average of about 14 seconds to complete trades via the exchange's manual approach, in which so-called floor traders take stock order tickets that are given to specialists and then typed into the exchange's systems by another floor trader.
Currently, though, only about 10% of the NYSE's daily trading volume is executed electronically through Direct+, according to Pellecchia. In addition, individual trades are limited to 1,099 shares at a time. Pellecchia declined to say how much of the trading volume is expected to shift to Direct+ after the system expansion work is completed.
Floor brokers likely will have less involvement with transactions as the NYSE expands its e-trading capabilities.
The price of upgrading the Direct+ system "is not something we've costed out yet," he added. "But it won't be an obstacle ... to doing it."
Along with making modifications to the Direct+ software to allow an unlimited volume of stocks to be traded electronically, the NYSE plans to give its floor traders new handheld computers that they will be able to use to enter orders directly into the system.
Nasdaq spokesman Wayne Lee said officials at the New York-based stock market don't see the NYSE's initiative as something that will put Nasdaq at a competitive disadvantage. "We just simply think the New York Stock Exchange is bringing its trading system into the modern era," Lee said.
Robert Hegarty, an analyst at TowerGroup in Needham, Mass., said investors have been pushing the NYSE for years to remove its volume caps on electronic trades. But the tradition of writing out trade tickets has been hard to overcome, he added.
"The other reason there was so much resistance is that it does take away the floor broker's ability to interact with the orders and thereby make money off those transactions," Hegarty said. But now the NYSE is "taking a run at Nasdaq," he said. "It's a dogfight."
NYSE CEO John Thain said the exchange will continue to offer trades via floor brokers because they add a "human judgment" to the process. But, he noted, NYSE officials "are seeking to upgrade significantly our use of technology to execute securities transactions."