I began my non-academic career in the Research Department at the NYSE, during the Dick Grasso Era. Back then, the Dow was below 10,000 – and the floor was packed with people. It was not unusual to see a lion on the floor of the Exchange, beach volleyball games on Broad Street, and celebrity visits almost daily. (My own brush with greatness was tripping over Jenna Elfman in the Blue Room of the NYSE trading floor. Had I fallen harder, I might have been able to sue and get some of that “Greg and Dharma” money. But unfortunately, only my ego was bruised).
Flash forward to the floor closure starting last week. The orderly trading on the NYSE has led many to question the value the floor adds – and whether it will ever reopen. I am sure that the impact of the closure will be the subject of many academic and practitioner studies. But for now, the most direct effect of the closure is primarily three-fold.
First, D-quotes are no longer available. As described in a prior post, D-quotes provide a way for traders who missed the MOC/LOC deadline to participate in the closing auction[1]. But as these orders can only be entered into the auction by floor traders, the closure of the floor makes these order types unavailable. Not only will this create a workflow disruption for traders and PMs who missed the cutoff, the loss of this additional flexibility – especially in times of heightened volatility – could have significant consequences on execution quality. Of course, the NYSE could replicate this by allowing direct electronic access to the auction via D-quotes or simply moving the MOC/LOC rules to mirror those of the D-quote. But for now, the absence of a key trading tool is likely to have consequences, especially since the D-quote volume is about 50% of the combined MOC/LOC volume on the NYSE.[2]
Second, the floor provides a means to achieve better standing in the book relative to pure time priority at other venues. Unlike other U.S. exchanges which rely on time priority, the NYSE has a fairly complex “Parity and Priority” structure that allows later arriving floor orders to trade on parity with earlier arriving orders.[3] While the scale of floor orders is small relative to the broader market, the ability to achieve parity has a measurable impact on performance. A recent academic paper estimates the cost of “violations” of time priority resulting from this structure. The paper shows that there are indeed measurable benefits to using floor traders to achieve parity with earlier arriving orders (at the same price), albeit at the expense of earlier arriving orders.[4]
Third, the floor traders remain a source of information, especially around auctions. The NYSE does disseminate meaningful pre-auction information to off-floor traders, which can be used by traders and algorithms to price and size their orders. But the incremental information provided by NYSE floor traders can be helpful around such periods of price formation. So, while the auctions themselves can function without the floor community – as evidenced last week on the NYSE and by the Nasdaq everyday – off-floor traders who had previously relied on floor traders for additional market color can no longer do so.
With that in mind, whether the floor re-opens will largely depend on whether institutional traders are willing to forego the additional benefits provided by the floor. Given the wide usage of D-quotes and the added flexibility provided by floor traders (not to mention the vocal support of NYSE leadership[5]), we likely haven’t seen the end of the floor era just yet.
The author is the Founder and President of The Bacidore Group, LLC.
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine, Markets Media Group or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community.
