The New York Stock Exchange has proposed changing the way it allocates its $105m (€73m) payments to specialist firms so that they are performance-based, as increasing volumes are traded electronically.  In a presentation to analysts last month, Duncan Niederauer, president, co-chief operating officer and head of US cash markets at NYSE Euronext, said the exchange pays an average of $9m a month to the specialist firms.

He said: “I'm less interested in reducing that number from $105m. I'm more interested in having it tied to performance and market quality metrics. What I would imagine is you will expect to see us, on or about September 1, begin to distribute a similarly sized pool, all other things being equal, but it will be much more tied to quoting performance and liquidity provision performance, which I think are much more closely tied to market quality.”

The NYSE has been struggling to support floor traders and specialists since it launched its electronic trading hybrid model in October last year, although chief executive John Thain has repeatedly pledged to keep the floor open.  Bear Stearns made a $225m writeoff on its specialist unit due to the uptake in electronic trading on NYSE in March. LaBranche & Co, one of the largest specialist firms, has initiated a review of strategic alternatives, including a possible sale, using Freeman & Co as a financial advisor, and Weil, Gotshal & Manges as legal counsel.

Van Der Moolen, the Dutch owner of VDM Specialists USA, has been reviewing the US business as the firm reduced staff from 207 to 100 following the introduction of the NYSE hybrid platform. This month, Van Der Moolen said after the restructuring it expects the US activities to be profitable in the second half year of this year.  The NYSE’s new variable payments to specialists firms for liquidity provision will be based on the exchange’s share of market data revenue from quoting NYSE-listed securities and a quarter of transaction fee revenue.

Each specialist firm will also be allocated a portion of the NYSE’s transaction revenues based on its trading performance in any month. The NYSE's Securities and Exchange Commission filing filing said: “A specialist firm’s allocation will increase if its performance as a liquidity provider improves relative to the other specialist firms.”  Previously, a portion of NYSE revenues was divided among the specialist firms based on on market share and another formula.  This way seem much more logical and fair, I am pleased to see the 'old boys club' moving towards change.