Getco LLC becomes NYSE designated market maker

Posted March 29, 2010 at 6:59 a.m.

Dow Jones Newswires | Hoping to harness the tech savvy of the
high-frequency traders who have eaten away at its business, the New
York Stock Exchange is bringing one of the biggest computer-driven
firms onto its iconic floor.

Beginning Monday, Chicago-based Getco LLC will become a “designated
market maker,” the role once occupied by the specialists who used to
fill the floor of the exchange, stepping in to buy or sell shares to
keep trading orderly.

The arrival of Getco, a pioneer in computer-driven high-speed trading, marks the first time the exchange has embraced such a technologically sophisticated player in the role. The move gives something of a high-tech stamp of approval on the NYSE’s modernization effort.

“This is validation that the NYSE can compete in terms of technology and price with the rest of the playing field,” said Jamie Selway, managing director of New York broker White Cap Trading.

A few years ago, the NYSE, owned by NYSE Euronext, was considered a dinosaur in the increasingly electronic exchange universe, hobbled by its slow-moving, human-run system and outdated infrastructure.

The NYSE launched its modernization effort with the hiring in 2007 of Duncan Niederauer, who later became CEO and who had previously run Goldman Sachs Group Inc.’s electronic stock-trading execution unit, and Larry Leibowitz, now chief operating officer, who is an expert in electronic-trading systems.

When they arrived, the NYSE was rapidly losing market share, and its stock price was falling, too. “It was desperate,” Mr. Leibowitz says. “None of the pieces worked. Everything was a gigantic mess.”

Nasdaq OMX Group Inc. and Bats Exchange Inc., which run computer-driven electronic exchanges, were scooping up market share by offering faster trading in NYSE-listed stocks that appealed to high-frequency firms such as Getco. The NYSE handled just 37% of all trading in NYSE-listed stocks in August 2009, down from about 70% in early 2007, according to Equity Research Desk, a Greenwich, Conn., researcher.

One of the executives’ first moves: Requisitioning $500 million from the NYSE’s board of directors to build two data centers that will cater to high-speed firms. One center, in Mahwah, N.J., is expected to be online by the fourth quarter. The other, just outside London, is slated to go live in the third quarter.

The pair also embarked on radical overhaul of the NYSE’s electronic-trading platform, internally dubbed Project X. Among the key improvements was speed. The time it takes to execute an order was cut to three milliseconds from 105 milliseconds. (A millisecond is one-thousandth of a second.)

Still, traders kept taking their business to other exchanges. Messrs. Niederauer and Leibowitz grew frustrated as they read an early morning market-share report that showed the NYSE’s rapidly slipping position. “It was a matter of whose turn it was to be demoralized and whose turn it was to be optimistic,” Mr. Leibowitz says.

The most visible change came in 2008, when the NYSE transformed its specialist system, which had become obsolete in the age of superfast trading. The specialists were replaced by designated market makers, the role Getco is stepping into. While designated market makers maintain a presence on the trading floor, ready to step in during chaotic markets, most of the order flow is handled electronically.

Getco, the first high-frequency-trading firm to take on the role, will eventually operate as the designated market maker for 350 stocks; it is taking over the assignments from Barclays Capital. The other designated market makers are big Wall Street firms and former specialists.

Getco already makes a market for about 500 NYSE stocks under the exchange’s special liquidity provider program, which it plans to expand. As a designated market maker, it will have greater responsibilities, managing the often hectic open and close of trading for the stocks it handles. In exchange, it will get better deals on trading fees.

“There’s an opportunity for us to leverage what we’ve been doing and bring that technology to the floor” of the NYSE, said Dave Babulak, a Getco managing director.

Getco, a private company with about 250 employees, trades heavily in all kinds of securities, including currencies, commodities and Treasury bonds. It often accounts for 10% to 20% of the daily trading volume of many U.S. stocks, posting offers to buy and sell and making a profit on tiny spreads between what investors are willing to trade.

High-frequency firms have come under fire in the past year as their influence in the market has grown. Critics say they exploit their greater computing ability to trade ahead of slower investors. Exchanges such as the NYSE have catered to the outfits, which bring huge volumes. Getco’s elevation to the status of a designated market maker helps legitimize the firms.

Investors for now will see little change in how the NYSE handles stocks. The hope is that as more tech-savvy firms climb on board as market makers, trading will become quicker and more efficient.

The NYSE still faces big hurdles. Competition is ramping up around trading of derivatives. Potential regulations that could curb high-speed trading and cut down on volumes are an unknown variable.

Still, there are signs of progress. The decline in trading volume of NYSE-listed stocks has leveled off in recent months. Market share ticked up to 39% in February.

Analysts are more upbeat. Raymond James analyst Patrick O’Shaughnessy in early March boosted his expectations for the NYSE’s U.S. stock volumes for the first quarter. UBS analysts said volumes this year through February were higher than it had expected. The NYSE’s stock is up nearly 100% since this time last year, when it hit its lowest level since going public in 2006.


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