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The New York Stock Exchange next week will unveil a plan for further upgrading its automated execution system, Direct Plus, to enable more trades to be processed electronically. Earlier this year, the NYSE upgraded the system to handle orders of any size and to let investors use the system as often and as rapidly as they like; previously, Direct Plus was restricted to order sizes of less than 1,100 shares and investors had to wait 30 seconds before entering another order.
The latest upgrade will enable "sweeping," which fills an order, even at less than the best price. For example, if an investor wishes to place an order for 1,500 shares and only 500 shares are available at the best price, the system will execute the order at the best price for the first 500 shares, then search for the second- and third-best prices, or as many as necessary to fill the remaining shares.
As presently constituted, the system only executes the first 500 shares, then processes the remaining 1,000 shares manually through the exchange's traditional open-outcry system.
To guard against wild swings in price that could result from large blocks of shares being swept electronically, the system will include a "circuit breaker" that limits the change in price to several cents above or below the best price. Once the circuit breaker is tripped, the rest of the trade will be routed onto the floor and processed manually.
The new system is intended to mute criticism from Nasdaq and the electronic communications networks, which have lobbied the Securities and Exchange Commission to abolish the trade-through rule, which they maintain harms investors by prohibiting an exchange from bypassing, or "trading through," the best price quoted on another exchange, which is frequently the NYSE--although NYSE doesn't guarantee that it will execute the trade at that price.
The system is likely to help staunch the flow of trading volume away from the NYSE, which has lost ground to electronic exchanges like Nasdaq and the ECNs. These exchanges now have about a 25% market share of trading in NYSE-listed stocks. There's little Nasdaq and the ECNs can do in response from a systems standpoint, as they're already fully automated, says Celent Communications analyst Jodi Burns. Instead, they're likely to try to persuade the SEC that the NYSE's moves toward electronic trading are palliative in nature and don't address the underlying issues surrounding the trade-through rule. The trade-through rule is one of the items the SEC is addressing in its proposal for a national market system; that proposal was issued in February and expected is to be adopted by year's end.