Reading the remarks of John Thain is the new Kremlinology.
As we noted in our earlier item, Thain defended the hybrid system yesterday. But one thing we didn’t get around to noticing until we re-watched the interview this morning is that hain defended not just the electronic aspects of the hybrid system but the human components as well.
“If anything I think that yesterday proved that we still need people here. And that’s really what hybrid is all about. And people were able to deal with, and really to overcome, the technical problems at the close yesterday,” Thain told CNBC.
Thain’s defense of the human element on the trading floor got our attention because it came on the heels of the announcement that Goldman managing partner Duncan Niederauer, who reportedly strongly favors moving to a fully electronic trading system, had been tapped to become a high-ranking executive at the exchange. There had been speculation that Niederauer’s arrival at the NYSE might presage a move to eliminate the specialists.
The hybrid system has been controversial, especially among specialists who trade on the floor of the New York Stock Exchange. Hybrid combines human traders with electronic trading and it’s introduction has led to a reduction in the number of traders on the floors of the exchange. Some specialists view the hybrid system as a sort of Trojan Horse for the eventual move to totally a automated, electronic system that would eliminate the specialists all together.
Some have pinned the blame for Tuesdays problems squarely on the electronic components of hybrid and the reduction of traders on the floor of the exchange. Traders we spoke to Tuesday evening pointed to this problem. And this opinion isn’t just confined to specialists (who obviously have an interest in blaming the electronic systems they fear may make them redundant). CNBC star reporter Charlie Gasparino also argued that the hybrid system was compromised by an inadequate number of specialists.
“One of the reasons why we had problems yesterday is because there aren’t enough specialists inside the hybrid working to make markets,” Gasparino said last night on CNBC’s “On The Money” program. “Ninety-percent of the time the electronic markets can work fine. You need specialists when you have these huge order imbalances.”
Reading the remarks of John Thain is the new Kremlinology.
Specialists at certain posts on floor of the New York Stock Exchange have been told not to close up shop yet, according to NYSE CEO John Thain, who spoke moments ago to CNBC’s Maria Bartiromo and Bob Pisani. It seems that the floor trader nightmare we described last night as “the death of the God of the Closing Bell” continues.
“Well, Maria, what you saw a little bit today and also yesterday was we had record message traffic volume through our system and several of the servers experienced queues. Which means that they don’t fail but they’re a little bit slow and they build up a traffic jam of messages. And so what we wanted to do today, as we did yesterday, was let that traffic jam, that cue clear,” Thain said.
Thain played down the significance of this afternoon’s delays, emphasizing that orders could not be entered after the 4 P.M. closing bell.
“Many times when there is an order imbalance at the end, it take a few minutes for the stocks to actually come up with a closing price. And that’s really what we were doing today. There were some orders we wanted to make sure it got to the post and then we closed the price,” Thain continued.
He estimated that it would take only a few extra-minutes to complete the process, telling Maria Bartiromo that the posts should be closed by 4:15.
If he was in charge of his own graphics it probably would have read “Business As Usual” instead of what CNBC tagged him with: “Specialists Told To Keep Trading Books Open After 4:00 PM ET.”
Color us skeptical when it comes to all the blather blaming yesterday’s sell-off on a computer glitch. Or glitches. Why? Because it seems the main thing that caused the computer glitch was so many sell-orders pushing through the system at once. If selling caused the glitch, how could the glitch cause the selling? Okay, maybe there’s a sequential, feedback loop thing going on here but isn’t it a little too soon to confidently point the finger at the robots?
The Wall Street Journal has some interesting reporting about what happened when the electronic trading systems broke down. Most the the tale, of course, comes from floor traders who, of course, mostly fear and loathe the robotic masters who are threatening their jobs. So you probably want to discount some of the “manual process which never breaks down” talk for self-interest from the people new NYSE executive Duncan Niederauer once reportedly referred to as “five guys named Vinny.“
After the Dow problem was resolved, other woes bedeviled traders. About a half hour before the closing bell rang at 4 p.m. Eastern time, traders reported having problems sending electronic buy and sell orders to the NYSE, which recently began converting to a largely electronic system.
At one post on the floor, traders resorted to writing buy and sell orders on a dry-erase board. Most of the letters next to the stock symbols said “S,” for “sell.”
“Go manual if you can,” said Art Cashin, a longtime floor broker for UBS, to traders at about 4 p.m. “Take paper if you have to.”
Traders were still negotiating stock closing prices 10 minutes after the 4 p.m. close. “You’re done, 50 grand at 74.20,” Michael Rutigliano, a floor broker at the NYSE, yelled into his headset shortly after the markets were supposed to have been closed.
Mr. Rutigliano reflected the frustration floor traders are feeling these days, as their role becomes diminished by the electronic age. “We were able to revert to a manual process that never breaks down,” he said.
Louis Pastina, an executive overseeing trading systems at the Big Board, said “a rush of orders” in the last hour of trading overwhelmed the exchange’s computers, leading to delays and an unknown number of orders that were never completed. Some trades may have been done on alternative markets or in an after-hours crossing session the NYSE extended by a half hour to 5:30 p.m., he said. He added that floor traders were finishing trades manually until around 4:25 p.m., about 20 minutes later than usual.
A spokesman for the NYSE said the new hybrid trading system — which matches most trades electronically but sends some to traders on the exchange floor — worked fine, but that another system that feeds it couldn’t handle the onslaught of orders.
After a Rough Morning, A Data Backup Jolts The Blue-Chip Average [$$] [Wall Street Journal]
Word hit last night that the New York Stock Exchange would as of right now be a wholly-owned subsidiary of Goldman Sachs and specialists would be scheduled for immediate extermination.
That, at least, was the reaction coming from a couple of specialists we spoke to today about the news that Goldman Sachs managing partner Duncan Niederauer had been named president and co-chief operating officer of the NYSE. He joins former Goldman president John Thain at the top of the exchange, and becomes Thain’s most likely successor as chief executive of the exchange.
But what really had tongues wagging on the trading floors was Niederauer’s enthusiasm for electronic trading, and possibly for eliminating floor specialists all together. Niederauer was the head of electronic trading at Goldman and was instrumental in arranging the NYSE merger with the electronic trading platform Archipelago, a move that many still see as the beginning of the end of the role of specialists on the trading floor. Prior to the merger, Niederauer sat on the board of directors of Archipelago.
As long as seven years ago, Niederauer was describing the situation of floor traders handling order flows as “an unsustainable model.”
On CNBC this afternoon, Charlies Gasparino described Niederauer as “one of the biggest advocates in electronic trading.” Gasparino also provided this bit of colorful background:
“This guy was advocating the replacement of the specialists with a computer because he basically thought specialists were inefficient and possible fraudulent. One time he said something along these lines to a high-ranking person at the New York Stock Exchange, “I don’t want five guys named Vinnie executiving my trades.”
This remark led then NYSE head Dick Grasso to treat Niederauer as an enemy of the stock exchange according to Gasparino, who described Grasso’s reaction as pronouncing Niederauer dead. Well, as they say, it seems as if stories of Niederauer’s death have been greatly exaggerated.
Gasparino also added that a move to completely electronic trading might not wait a few years from now when Niederauer might become the chief of the exchange.
“I think it’s going to be a lot sooner,” Gasparino said. “A lot of people on the floor are telling me it’s a lot sooner than two years. It’s possibly a year or a lot or even sooner than that.”
Goldman Partner Joins Top Ranks At NYSE [Forbes.com]
Niederauer Is Clear Heir to NYSE’s Thain [CNBC.com]
Remember that David Finnerty case we mentioned yesterday. You know, the one with the New York Stock Exchange specialist who the government accused of improperly inserting themselves in between customer trades. The one that the judge threw out yesterday because the prosecutors failed to show that the customers had any expectation that Finnerty wasn’t interpositioning himself in their trades. Today Larry Ribstein wonders whether this case might undermine some of the theory beneath the case against brokerage firms accused of making money by trading on advance knowledge of trades by big customers. If the customers expected that the brokerages were going to do this, does this make it all okay?
Well, a lot of folks look at that kind of trading as a form of illegal “insider trading.” But is it? Ribstein sounds a skeptical note.
Possibly. But is this speculation trading on material inside information? There are a lot of facts here that need to be unraveled, and perhaps the SEC should be looking into them. The danger is that all of this is going to disappear into the black hole of a criminal investigation and trial. After all, there’s the whiff of “insider trading,” which ramps up the feverish public demand that regulators and prosecutors “do something.”
But a criminal trial is not the way to find out the institutional background necessary for a worthwhile regulatory fix. It’s a long and expensive process, replete with procedural roadblocks. The whole thing could end the way the NYSE specialist cases did – ten out of 15 cases aborted or lost, with this negative result in the Finnerty case.
The controversial conviction of NYSE specialist David Finnerty was thrown out by a federal judge this morning. Finnerty was convicted back in October after a surprisingly brief jury deliberation that led some to wonder whether the verdict would stand up on appeal. Now we know it didn’t.
U.S. District Judge Denny Chin in New York today set aside the jury’s guilty verdict. Jurors in Manhattan federal court found that Finnerty, who worked at Fleet Specialist Inc., illegally inserted his firm as a middleman in trades that should have been made directly between two customers.
The ruling is the latest blow to prosecutors in what was the biggest crackdown on illegal trading at the Big Board. Of 15 specialists charged with fraud by the U.S. in April 2005, three, including Finnerty, were convicted at trial, and two pleaded guilty. Two other specialists were acquitted, and prosecutors dismissed charges against seven others. One remains a fugitive.
Chin said prosecutors failed to present enough evidence to show that investors were defrauded. “What did customers expect when presenting an order to specialists?” Chin said in a 37-page ruling. “What did customers `trust’ the specialists to do? None of these questions were answered by the evidence.”