NYSE Specialists

The following link isn't currently working properly, and I have reported it to CNN. But because of its importance to our study of finance and investments, I am posting the article here.

http://money.cnn.com/news/newsfeeds/articles/djf500/200809301638DOWJONESDJONLINE000624_FORTUNE5.htm

Specialists' Moves Monday May Have Staved Off Bigger Market Fall

Dow Jones
September 30, 2008: 04:38 PM EST

NEW YORK -(Dow Jones)- Black Monday could have been even darker. Proponents of open-outcry trading say that specialist market makers on the New York Stock Exchange, faced with a flood of selling orders late Monday, took the buy side or aggressively solicited for buyers on several large financial companies that were selling off.

By assuming the role of buyers or soliciting them, these specialists may have helped limit losses at the bell. In this solicitation, specialists that represent some financial
companies said they would take buy orders in a late crossing session - a move that helped create a floor to some of the selling and kept an even bigger decline from occurring.

"If this was purely electronic, it could have been down 1200 or 1300 on the Dow," said Bernie McSherry, a senior vice president with Cuttone & Co., the largest independent floor operator at the NYSE.

For the session, the Dow lost more than 777 points as the defeat of a proposed $700 billion bailout package in the U.S. House of Representatives sent traders scrambling. At many Wall Street companies, traders reacted to live footage of the vote count on the floor of Congress around 2 p.m. EDT with heavy selling.

Going into the 4 p.m. close, brokers on the NYSE floor say specialists published huge sell imbalances in many financial names, but were actively looking to find buyers. Specialists surveyed their books to find brokers that had purchased the financials on their books at certain levels in the past and went asking again. To solidify this negotiation, specialists made verbal commitments to settle up buy trades in a late crossing session, while continuing to execute sell orders. While this helped specialists pare some of the large positions they would have to keep on their books thanks to the
trade imbalance, it also served to help create a floor on some of the trading.

"[Specialists] created trades that otherwise would not have occurred...when someone alerts a broker and says look at this, you create an interest. That facilitates trading that doesn't happen in other markets," said Dave Humphreville, president of the Specialist Association, which represents market makers on the floor of the NYSE.

Still, a trader at one leading Wall Street algorithmic firm said the volume of stock handled by the specialists was small compared with the overall listed volume, and may not have had a broad impact.

Overall, specialists executed 141.5 million shares on Monday, more than double the 63.4 million shares they execute on an average day year-to-date. Overall volume was high, however, with about 7.3 billion shares trading on the NYSE Composite, meaning that the specialists handled about 1.9% of the volume.

"The New York Stock Exchange floor in general is shrinking as things go more electronic," the trader at the electronic-trading unit said. The dark pool, an electronic crossing network that is an alternative to stock exchanges, at this firm and others are seeing record volumes during the recent volatility. One such venue traded half a billion shares in a single session earlier in September.

As for who bought from specialists, representatives for two floor brokers say specialists disseminated information out to "anyone in the stock market community" that they would take these buy orders in an extended session. The "specialist helps in price discovery so, if they slow the market down, there would be better price discovery," said Tim Mahoney, chief executive of Bids Holdings, an electronic trading group that has partnered with the NYSE.

Among the names that changed hands in the crossing session were some of the large banks, including JPMorgan Chase & Co. (JPM), Bank of New York Mellon Corp. (BK), and Morgan Stanley (MS). "The specialists performed an important function by soliciting contra-side buy interest and that helped cushion some of the downward
move. It's happened on a stock by stock basis over the years, but I haven't really seen that happen on as broad a basis before," said McSherry.

Nonetheless, the "selling imbalance" at the close of the session, when sell orders flooded in, meant that prices slipped steadily during the extended trade. After being down fewer than 600 points at the closing bell, the Dow had taken a loss of 738 points by 4:12 p.m. EDT and at 4:15 p.m. EDT, when all orders were processed and closed, the loss was more than 777 points.

The Standard & Poor's 500 also took a long time to settle at its final close, ending down 8.8%. The Nasdaq Composite, which settled more quickly than the other two indices and had no specialist involvement, fell 9.1% - a comparable loss. "A lot of [specialists] went home way more long than they usually do. It's not what they like to do, but there was a buyers' strike towards the close," said Ray Pellecchia, a spokesman for the NYSE.

-By Geoffrey Rogow, Dow Jones Newswires; 201-938-5360; geoffrey.rogow@
dowjones.com