http://www.msnbc.msn.com/id/17176086/
The article listed above discusses the decreasing role of specialists in the New York Stock Exchange (NYSE). Within the past few months, the number of traders on floor of the stock exchange has dropped from 3,000 to 2,100. The cause of this decrease in specialists is due to the increased dependence on electric transfers. In class, we discussed how the specialists work: they process ask and bid prices for certain stocks. But, computers can perform this very same function with greater speeds and efficiency. Accordingly, the average speed of a transfer has dropped drastically, from 9 seconds to three-tenths of a second.
The new dependence on electrical systems is due to competition with Non-Intermediated Stock Markets, specifically NASDAQ. In class, we defined Non-Intermediated Stock Markets to be markets that function without specialists, and relied solely on direct trades. These stock markets are “more open and transparent, where all trades are equal and without the influence of brokers that might have a bias.” The increasing popularity in these automated trading networks has forced the NYSE to adapt to the digital age. Slowly, the shouts of “buy” and “sell” are being replaced by computer operations.
However, even with the increase of reliance on electric systems, these specialists are not going to be completely replaced. The article states that humans hold one advantage over computers: human intuition. Computers cannot trade with a so-called “gut instinct” that many specialists rely on. Instead of turning towards a fully computer-run system, the NYSE has become a hybrid market, which “infuses the speed of electronic trading with the experience of seasoned professionals.” With this new hybrid stock market, the NYSE gains the efficiency of running most trades through computers. But with certain cases that demand more attention that most, they still have the ability to run that trade through a specialist.
As Louis Pastina, an executive vice president at the NYSE in charge of the hybrid rollout, puts it: “You might buy a book on eBay, but you might not want to buy a brand new Mercedes Benz that way. The same thing applies here.”
I run NYSE’s HybridTalk blog, and read your post with interest; my compliments on the thoughtful discussion. You’re studying markets at the best possible time — the evolution taking place right now is fundamental and far-reaching.
My one suggestion is that you might want to re-consider your categorization of markets as intermediated or non-intermediated. Simply having a trading floor does not mean that a market is intermediated, and being “all-electronic” does not mean that a market is non-intermediated. For example, at NYSE, for the vast majority of orders, buyer and seller meet directly and electronically, without a dealer participating. If you’re using a floor broker as agent for your order, I would consider that broker an agent, not an intermediary. And on a market such as Nasdaq, you might buy or sell shares from a dealer (an intermediary), or an electronic communications network, or some combination of the two. The lines are not so black-and-white anymore.
If you or your readers would like to see further discussion about our Hybrid Market, our blog is at http://hybridtalk.nyse.com
Thank you! — Ray Pellecchia