It looks like brokers at the American Stock Exchange have just scored a little victory in the ongoing war between man and machine.
Some fast talking with Amex and Nasdaq management over the last few weeks may have earned them the right to keep doing the job many have come to love - shouting out orders in the traditional "open outcry" auction system, even if the exchange merges with the electronic Nasdaq, as proposed.
The merger, which was approved by the boards of both the Nasdaq and the American Stock Exchange on Wednesday, is awaiting a vote by Amex members, expected some time within the next month. If it goes through as currently outlined, at least US$110 million will be spent on new technology. Observers originally thought that such a deal would spell an end to the physical trading floor, with Amex being absorbed into the electronic Nasdaq, and traders eventually squeezed out of jobs.
"Originally, the deal looked very threatening for brokers," said Steve Lesser, an independent market maker and head of the Amex Option Market Makers Association.
The original merger proposal aimed to expedite the order and execution process, and thereby cut costs. The merger has been widely regarded as a means for the second and third place exchanges to give the number one New York Stock Exchange a run for its money.
The terms called for an upgraded electronic order system that would have been given priority over floor brokers if both tried to execute a trade at the same time. But from a broker's point of view, the plan looked like a move toward a more automated future which would cut them out of the loop.
"There would have been very little reason to have us here on a day-to-day basis anymore," said Stuart Alpert, the head of the Amex floor traders' association.
Nasdaq managers wanted trade orders to be executed on a first-come, first-served basis. If Merrill Lynch or Smith Barney or any other big brokerage placed an electronic order to buy 100,000 shares of a stock at a certain price, and a floor broker wanted to buy shares of the same stock at the same price, he'd be out of luck. By the time the 100,000-share electronic transaction was completed, it's unlikely that there would be anything left at that price.
When Alpert got wind of that news, he and Amex vice chairman Anthony Boglioli, who is also a floor broker, began making the case to Amex directors that floor brokers' experience and intuitive understanding of market conditions is an invaluable asset for customers.
"The value added for a customer by an astute floor broker cannot be measured in pennies per share," said independent floor broker Howard Lasher.
Jerry Wilson, an equity trader for Ivy Mackenzie Capitol Funds, and a former head of the Amex floor brokers' association, echoed the point. "If I give an order for a 50,000 share trade, I'm counting on a broker to get me the best deal possible," Wilson said.
Such thoughts apparently made for a persuasive argument. According to Alpert, the National Association of Securities Dealers, which runs the Nasdaq, agreed to give floor brokers parity in the new Amex-Nasdaq system if the merger comes to fruition.
NASD spokesman Scott Peterson wouldn't confirm any details of the deal, saying that so far it is just an outline that is still being hashed out.
But Willie K. Weinstein, who sits on the Amex board of governors and is chairman of the Genesis Merchant Group brokerage, said that Nasdaq officials see the benefits of a hybrid system. "The agreement as it is formulated now is better for everyone," he said.
Under the new terms of the proposed deal, orders placed from the floor or electronically will have equal status. So, in the 100,000-share trade scenario, floor brokers would be able to get in on the action, too. Orders from both the physical and virtual trading floors will be executed simultaneously; when shares at a certain price run out, they run out for everybody.
So far that idea seems to have the blessing of both management and the brokers on the floor.
"I'm starting to believe in the merger being a good thing," said former floor traders association president Jerry Wilson. "I'm in favor of the [Amex's] auction market. But now I'm in favor of over-the-counter, too. I think a merger of the two would be terrific, if they do it right."
Weinstein emphasized the beauty of choice. "If one takes the view that he or she would rather execute a trade electronically, they can do that," Weinstein said. "On the other hand, they can buy the services of a trained professional to make the decision for them as to whether or not they should pay $21 or $21.5 for a stock. That's the role [floor brokers] play today and that's the role they will continue to play tomorrow."
Official details of the agreement won't be made public until a deal is done, but it is still possible that a merger will jeopardize some brokers' jobs.
"If this merger goes through, more and more of the equity orders will be delivered to the specialists electronically," Lesser said. "It's possible that it would eliminate some people's positions ... in ways that aren't clear to me yet."
