Is This Really Goodbye? And Why?

Abstract

Price improvement has always been one of the hallmarks of the NYSE market structure. Thus, the observation that price improvement has shrunk dramatically at the NYSE as the Hybrid has rolled out calls into question one of its key competitive edges. But it's not the whole story. The decline in price improvement has been accompanied by other market quality improvements, in each case natural consequences of the changes in market structure dynamics. Most notably, spreads have narrowed (and of course one could consider this as a form of built-in price improvement that is already in the quote), speed has increased a whopping 30-fold, certainty of execution has increased leading to fewer missed markets, and fill rates have gone up. While price improvement statistics could pick back up somewhat as specialists get more accustomed to using their algorithms for making actual trading decisions, moving beyond merely automating formerly manual processes, and as more discretionary order types and perhaps an API are introduced for brokers on the floor, they are not likely to return to the percentages of the past. This outcome is due mainly to the fact that the market structure has changed dramatically, with auto-ex becoming the predominant form of execution on the NYSE. By its nature, this limits the willingness of counterparties to price improve since they must be proactive in their decision-making in an auto-ex environment as opposed to reactive in a predominantly manual market. Even though the resultant decline in price improvement should be expected and is counterbalanced with other market quality improvements, it highlights the risks facing the NYSE. With price improvement statistics that are rapidly approaching ECN levels, the NYSE is at real risk of becoming a giant, slow-moving, “me too” ECN. Over time, differentiators, like a restored edge in delivering price improvement or a creatively reinvigorated block product utilizing the Hybrid, will be necessary for the NYSE to maintain market share in trading volume and attract listings.