NYSE Plans To Expand Electronic Trading VolumeNYSE Plans To Expand Electronic Trading Volume

The New York Stock Exchange will phase in over the next year a turbocharged version of its Direct Plus electronic trading system that it hopes will significantly expand the volume of trades processed electronically, currently about 10%.

The upgrade is being made to give investors greater choice and to stem the erosion of market share to Nasdaq and electronic communications networks, which are all-electronic. "If we didn't do it, volume would continue to leave the floor," NYSE CEO John Thain said in a news conference Monday. The upgrade plan is subject to the approval of the Securities and Exchange Commission.

The upgrade will entail a significant technology investment, mostly in software, with the cost to be absorbed by the NYSE's IT budget.

The system will feature "sweeping," a process for filling buy and sell orders at prices that deviate from the best price by a margin of between 5 and 9 cents, depending on the price of the stock. Once that margin is exceeded, the order will be flung out of Direct Plus. Exactly what happens at that point wasn't made clear by Thain. "Does it get exposed to the floor [brokers] or does it automatically get canceled?" says Bill Cline, global managing partner of capital markets at Accenture.

Either way, the move is a substantial step toward meeting the SEC's definition of a national market structure featuring "fast" and "slow" quotes, Thain said. It's also a compromise toward preserving the trade-through rule, which prohibits an exchange from bypassing, or "trading through," the best price offered on another exchange--usually the NYSE.

Whether that will fly with the SEC remains to be seen. Its final ruling on national market structure, including whether to preserve the trade-through rule with an opt-out provision or scrap it entirely, isn't expected until year's end.