Even as the trading markets have become fragmented and electronic, brokers on the floor of the New York Stock Exchange still provide value, according to one veteran floor broker. Brokers on the exchange floor can offer "parity" and point-of-sale information that few others can, he said.
Jonathan Corpina, senior managing partner at Meridian Equity Partners, spoke to Traders Magazine about how floor brokers are still relevant in a market increasingly dominated by algorithms, electronic indications of interest and pinging.
"We are the only liquidity center that has the use of parity, and as brokers, it’s a tremendous advantage we have over other venues," Corpina said.
Floor traders on the NYSE traded huge volume in Citi every day before its reverse split on May 9. That was because they benefited from parity, which gave the clients of floor brokers a distinct advantage.
In other words, the NYSE does not follow a time-priority model for order handling, as most electronic marts do. Instead, the NYSE has parity and a priority rule. That means the entire order in gets priority and not one trade, even if the market moves away and comes back to that order. . Under a time-priority model, competition is stiff because a trader must be very fast to get to the head of the line to capture order flow.
At the NYSE, whoever sets the best price first gets filled first. But that fill may be for only 100 shares, and at the New York, time priority is good for only one trade. If the first man is bidding for 1,000 shares and a 100-share sell order comes in, that’s all his priority gets him. Any subsequent incoming sell orders are shared with the pack.
"Thanks to the use of parity, we have higher execution rates than off the floor, higher provide rates of liquidity than outside the building," Corpina said.
That’s why his firm built parity into all of its algorithms. Thus whether he executes a trade high-or-low touch, parity is utilized.
As for the next parity trade, Corpina said since the Citi reverse split, no other single stock has surfaced making such a trade profitable. However, the search continues.
"People are looking to find the next Citi – but so far, nothing," Corpina said. "Rather, some parity trades have emerged in a bunch of smaller little stocks or baskets of stocks." He cited Bank of America and Sprint as examples.
Away from parity in trades, Corpina still believes floor brokers provide valuable information to clients at the market open and close. This holds especially true when it comes to the price discovery process at the start and end of the trading day as well as when it comes to block trading.
"The initial or closing price discovery process is an important fact we can provide and can only be extracted at the point-of-sale," he said. "A lot of the block order flow is represented on the floor and only accessible down here."
Floor brokers, he added, assist again during trading halts in the price discovery business because of their physical position of being on the floor. Firms on the floor also aid in the pricing process throughout the day by providing depth of book information straight from the trading floor, something unavailable via electronic data vendors, Corpina said.
Brokers can communicate with designated market makers when working a large order and get the information he and his clients need from the order book via his handheld, he said. Thus, he can work the order and utilize his access to the entire community of professionals on the floor, which include the sales traders, clerks and designated market makers to find the liquidity he needs to consummate a trade.
"In a sense, we are human dark pools," Corpina said. "There’s human conversation and transparency in the pricing of blocks and shares. This helps us do our jobs and we’re only as good as the liquidity we can find and provide."
