As the New York Stock Exchange trading floor cautiously reopens, traders and brokers are facing a different trading climate than the one they had at home.
When the New York Stock Exchange (NYSE) trading floor opened Tuesday, May 26 after two months of closure, the floor looked different from its usual scene of overcrowded traders.
New York Governor Andrew Cuomo rang the opening bell, signaling the start of in-person trading to a few dozen traders — a noticeable contrast with the hundreds of traders just before it closed in mid-March. For its reopening, the NYSE required traders on the floor to wear masks, sign waivers, and maintain distance between other people in the iconic Wall Street building.
This year’s pause on in-person trading at the NYSE is the longest recess since World War I. However, while the trading floor itself has been closed during 2020, the markets remained open (albeit with heightened volatility). With the steady shift towards electronic trading, the closure during COVID-19’s outbreak was an experiment in eliminating the physical trading floor.
Even though electronic trading kept the markets moving through the spring, the trading floor still has its advocates for keeping human traders at the Big Board. No matter how much technology has improved speed and accessibility, some investors say there are advantages to trading in the crowd that electronic traders miss. But as the floor slowly reopens post-pandemic, the NYSE trading floor could potentially look different than it did before.
Trading on the floor of the NYSE is a hybrid of electronic and human decisions. Instead of the swamp of paper tickets littering the floor by the end of the day, people in the booth can enter orders electronically. Still, those who are physically present on Wall Street can benefit from certain points of in-person communication.
Human interaction can help with more complex trades because they can get better execution by working with other traders. In person, traders who can pick up on non-verbal cues or follow up with a conversation may have the edge.
Moreover, floor brokers can verbally represent their orders in the crowd with designated market makers (DMMs), as opposed to only electronic order entry at the close. This can prevent leakage.
One of the most prominent advantages for brokers who are on the floor is the closing auction. The final list price at the closing auction is the day’s official price, and brokers who use any other price might introduce a tracking error against the standard benchmarks.
Only brokers on the NYSE floor can use special quotes known as “d-orders” or “d-quotes.” These can give brokers 10 minutes of extra time to adjust or add stock orders at the end of trading and smooth out trading imbalances.
With exclusive access in the closing auction, brokers on the floor have an advantage during the largest moment for liquidity of the day. According to the NYSE, the closing auction trades $8.9 billion on average per day. This significant amount of liquidity at the close is opportune for minimizing the market impact costs of large trades.
REALITY OF REOPENING
For those used to the fanfare of the IPO at the opening bell, the past few months may have felt fairly unexciting. As tempting as it may be to come back to full capacity, though, prioritizing safety in the wake of COVID-19 means the NYSE had to mandate changes.
All personnel working on the exchange floor must sign a liability waiver with the Exchange in order to return to the floor. Although the Exchange can regulate behavior from their own employees, they cannot do the same with the firms that enter the facility. Therefore, the waivers inform those entering the building the need to abide by certain conditions and the risks they accept. Several of the larger brokers have refused to sign this waiver, and so far have not returned any staff to the floor.
Among those who have signed the waiver, very few floor brokers are allowed at their booths to to permit for the required six feet of social distancing. Only about 30 percent of the normal floor brokers have returned so far. DMMs, who usually help keep the market liquid, have not been present.
That liquidity has been one of the main advantages of the NYSE. Even though competition from the past few decades has limited its dominance, the NYSE is still the largest percentage of volume execution venue in the world, making it the preferred trading destination for NYSE-listed shares.
“Computers process information, but people think,” says Gordon Charlop, Managing Director/Partner at Rosenblatt Securities. “Having a broker at the point of sale be able to interact with that liquidity [and] make sure that their customer gets the right amount of stock at the right price is something that can only be handled by a floor broker.”
The NYSE proved the stock market could continue electronically during its recess in the past few months. The forced trading floor closure and the continuing social effects of the coronavirus have clouded the future of the floor, creating doubts in some investors if the NYSE will return to its exact operations from mid-March.
Despite the evolution of trading technology, the absence of the trading floor has illustrated the limitations of all-electronic trading. For those who still value seeing the historical landmark, even the subdued opening on May 26 must have been a relief. After months without the spectacle of the famous opening bell, seeing the doors open at 11 Wall Street may have given investors the optimism they have missed during the past few months.