NYSE floor brokers get ability to provide greater value, choice to customers

By: Ray Pellecchia

File Under: NYSE

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Here's an important step in the right direction: the SEC has approved the ability of NYSE member firms to operate from the trading floor in a manner similar to their "upstairs" desks. This means that NYSE floor brokers will be able to provide greater value and choice to customers, including trading a broader variety of products and non-NYSE-listed issues.

The SEC's action gives floor brokers greater parity with upstairs desks and other traders, particularly with respect to handling large-block orders, accessing other markets and diversifying their businesses.

I don't want to sound complacent, which is the worst thing you can be. But those predictions of the floor's imminent demise are beginning to sound as questionable as usual.

Still, additional building blocks need to be in place. Among other things: specialists, too, need greater ability to add value.

My colleagues are working on it. More to come.

I'll post -- as soon as I have them -- the links to the approval order and the related note to members. In the meantime, here's the rule filing that the SEC approved. And following is an excerpt from the filing, and it's rather lengthy (even omitting the footnotes, which I've done), because I think it's important to understand why we're making this change and the regulatory care with which we're doing it:

I. Operation of an "Upstairs" Office from a Floor Member's Booth Premise

As a result of the changes in the way in which trading occurs on the Exchange (and in the securities markets in general) due to, among other things, Regulation National Market System ("Regulation NMS") and the Exchange's operation of its Hybrid Market, the Exchange seeks to modify the Exchange Rules that impede Floor broker member organizations from operating within its booth premises similar to a member organizations' "upstairs" office.

Although there is no Exchange Rule that specifically prohibits a Floor broker member organization from operating within its booth premise similar to its "upstairs" office, the ability of a Floor broker member organization to operate its booth premises in this manner has been restricted by certain Exchange Rules. For example, member organization staff operating out of such booth premises, who are not Exchange "members" are constrained in the way in which they are allowed to process orders sent to the booth, as Exchange Rule 54 limits the right to conduct business "on the Floor" to members.

The impetus for the proposed amendment is the result of several factors. Competition from other market centers and growth of alternative trading systems, coupled with increased internalization by broker-dealers, has challenged the dominance of the trading post as the centralized locus of the representation and execution of orders in a particular security. Recent statistics provide potent proof of this -- there has been a 49% decrease in Floor broker share of total NYSE trading volume on the NYSE between the first quarter of 2006 and the first quarter of 2007. At the same time, the rapid dissemination of consolidated quote and trade information and real-time updates of the Exchange limit order book has increased exponentially the amount and accuracy of available information and the speed with which it is disseminated. These changes have not only impacted the way in which information is collected and processed, they have also increased competition for member organizations, which are continually searching for ways to provide more efficient and less costly service to their customers.

Therefore, the Exchange seeks to provide its Floor broker member organizations with the ability to access other markets and trade a wider range of products from the Floor broker member organizations' booth premises located around the perimeters of the current Exchange Floor and lining the passageways connecting the rooms that comprise the Exchange Floor. The NYSE believes that this will provide the Floor brokers with the ability to remain competitive in view of changes in the markets and the manner in which customer orders are handled and executed. Pursuant to the proposal, a Floor broker or appropriately registered and supervised booth staff would be able to transmit orders in NYSE listed securities that they have received on the Exchange Floor to away markets for execution directly from its booth premises without having to send the order to an upstairs trading desk. The instant proposal will further allow member organizations to centralize these operations within their booth premises.

To remove the impediments to Floor broker member organization ability to efficiently operate its business from the Exchange Floor, the NYSE seeks to amend Exchange Rule 70 ("Bids and Offers") to add Supplemental section .40. Proposed Exchange Rule 70.40 will allow member organizations approved to operate a booth premise to handle orders in all securities, including those listed on other markets from their approved booth premises. The proposed rule will also allow the member organizations' appropriately registered and supervised booth staff to handle orders in a similar manner that sales traders are permitted to operate in "upstairs" offices, subject to restrictions described below. As such, the Exchange seeks to make a corresponding amendment to Exchange Rule 54 in order to permit appropriately registered and supervised booth staff of member organizations operating out of an approved booth premise who are not "members," to process orders sent to the booth in the same manner that a sales trader in an “upstairs office” is allowed to process orders.

Since the booth premise will operate as an "upstairs office," a member organization, consistent with the type of business activities it seeks to operate in its approved booth premise, will be required to comply with all applicable rules governing the operation of a public business. The specific rules that will apply to the operation of an approved booth premise will depend on the type of business that the member organization is approved to operate by NYSER. For example, a member organization that is approved to operate its business solely from a booth premise and only provide Exchange Floor executions for other member organizations would no longer be required to carry Fidelity Bonds pursuant to Exchange Rule 319. Moreover, pursuant to the proposed rule, a member organization is required to obtain approval from NYSER prior to implementing any changes in the operation of its approved booth premise.

Unlike the "upstairs" offices, member organizations approved to operate booth premises pursuant to proposed Exchange Rule 70.40 shall be prohibited from effecting any transaction for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion from such approved booth premises.

In addition, proposed Exchange Rule 70.40 will require that member organizations operating approved booth premises in this manner must adopt and implement comprehensive written procedures and guidelines governing the conduct and supervision of business and staff at the booth, as well as a process for regular review of these procedures and guidelines and compliance therewith. These written procedures and guidelines and any changes thereto must be approved by NYSER prior to their implementation.

Exchange rules that govern trading on the Exchange Floor will continue to apply to member organizations on the Exchange Floor, including those member organizations operating within an approved booth premise. Member organizations that operate within an approved booth premises pursuant to the proposal will also be required to comply with all rules that govern upstairs activity. Through this filing, the Exchange seeks to amend Exchange Rule 123(e) to make clear that member organizations operating a booth premise that choose to route an order to the Exchange Floor for execution must, immediately upon receipt of the order and prior to representation and execution on the Exchange Floor or placement in an agency interest file within the Display Book system or routing the order to a Floor broker for execution at the post, enter such order into an electronic system on the Exchange Floor.

The Exchange further seeks to amend Exchange Rule 123(b) and 132B(a)(1) to make clear that orders in NYSE listed securities sent to or generated at a member organization's approved booth premise and routed to
another market for execution must continue to comply with the requirements of NYSE Rule132B (Order Tracking Requirements). For such orders, the provisions of Exchange Rule 123(b) shall not apply; rather, the provisions of the Exchange Rule 132B will apply to such orders. Moreover, as it relates to any order initiated and/or routed from a member organization's booth premise operating pursuant to proposed Exchange Rule 70.40 for execution on another market center, the Exchange seeks to amend Exchange Rule 134(d) to make clear that member organizations are prohibited from processing errors related to transactions on another market center in its Exchange required error account. Member organizations continue to be required to maintain:

...an error account at a registered broker or dealer in his or her name, or in the name of his or her member organization; or (b) such member participates in an error account established for a group of members...

Nevertheless error transactions processed in said error account must be limited solely to transactions executed on the Exchange Floor. Of course, member organizations must follow the applicable rules of the away market center related to error transactions.

II. Regulation of Approved Booth Premises

The proposed amendment envisions robust regulation of the staff and business conducted from booth premises by both the member organization and NYSER. For example, prior to operating booth premises in the manner permitted by the amended rule, a member organization must receive the approval of NYSER. In determining whether to grant such approval, member organizations will be required to provide NYSER with, among other things, detailed information regarding the proposed systems and order handling process, proof that all personnel are appropriately registered, proof of independent compliance personnel and proof of adequate supervisory controls.

Further, the member organization must adopt and implement comprehensive written procedures, which also must be approved by NYSER, in governing the conduct of its business and staff and must review compliance with these procedures on a regular basis. In addition, the same registration and supervisory requirements that apply to upstairs offices must be followed in the booth premises.

The Exchange expects member organizations to vigorously supervise compliance with these procedures. NYSER will also appropriately review compliance with these obligations and has the authority to enforce them through the disciplinary process as warranted.

NYSER will periodically examine the member organization's business conducted at its approved booth premise. Further, NYSER has the ability to examine the member organization's business conducted at such approved booth premise in the same manner as it has with respect to a firm's "upstairs" office. The review would include an examination to confirm that the member organization has in place adequate policies and procedures to reasonably prevent and detect, among other things, effecting proprietary transactions from its approved booth premises and ensure compliance by the member organization with the other related provisions of proposed Exchange Rule 70.40. NYSER further represents that its procedures are adequate to appropriately review compliance with all obligations delineated in proposed Exchange Rule 70.40, including the prohibition against proprietary trading, during its examination of the member organization's approved booth premise.

There's a lot of thereto and therewith therein, but you get the picture. Sorry for the long excerpt, but I thought it was important to explain this change fully, from both the competitive/business perspective and the regulatory side.

Happy Monday, folks. On This Day, the greatest football coach ever, Vince Lombardi (1913-1970), was born. According to my Bartlett's Familiar Quotations, he never really said, "Winning isn't everything, it's the only thing;" the actual quote was "Winning isn't everything, but wanting to win is." My own favorite from Lombardi:

The measure of who we are is what we do with what we have.

Tags: New York Stock Exchange, Hybrid Market, NYSE, NYSE Euronext, NYX, trading, stock market, floor brokers, SEC, Vince Lombardi