NYSE: Gains Are Far From Automatic -- Barron's

Includes: KCG, LAB, NYX
by: SA Eli Hoffmann

Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

COVER STORY: Death of the Floor by Michael Santoli

Highlighted companies: NYSE Group Inc. (NYSE:NYX), LaBranche & Co. Inc. (NYSE:LAB), Van Der Moolen Holding NV (VDM), Knight Capital Group Inc. (NITE)
Summary: Investors love the NYSE's (NYX) ongoing electronic transformation NYSE Chart 20 11 06and its planned Euronext merger. This month it announced it would lay off another 500 employees (17%) and close one of its five trading rooms. Presently testing a "hybrid market" (with 200 tickers) that still gives specialists some advance notice of incoming orders in exchange for promised liquidity, many see the current situation as a stop on the way to full automation and complete elimination of the floor. In hybrid stocks, clerks save an average 40,000 keystrokes per day per stock, volume is up, and the bid/ask spread is 13% tighter. Partner LaBranche & Co. Inc. (LAB) made no money last quarter in its specialist operations, and specialist Van Der Moolen Holding NV (VDM) took a write-down charge. Specialist participation rates in trades are down 25%. As the NYSE electronic inititiative gains speed, investors are betting so will volume -- some say it will double, and the more conservative peg volume gains at 50%. The market value of all NYSE-listed stocks is more than 3x that of Nasdaq (NASDAQ:NDAQ), yet total daily volume is similar, thanks to the black-box players' focus on Nasdaq names due to its full automation. Specialist firms may look towards Knight Capital Group (NITE), whose core business was running breakeven a few years ago. Since spring 2005, Knight essentially automated its order-matching algorithms, which formerly were handled by teams on a huge trading floor; Knight shares have risen to 18 from 7.50 since mid-2005. Specialists once made their money with their Trading Old New 20 11 06quick wits; now they must survive with clever code. (LaBranche has 30 quants toiling away trying to get it right.) NYX currently trades at 40x 2007 earnings -- on hoped-for '08 earnings of maybe $3-4 a share, and more farther out. Investors think CEO John Thain is, "playing a multiyear chess match and is thinking several moves ahead... They're convinced he's underpromising and ready to overdeliver." Barron's: With the stock where it is, a lot needs to break right.
Related: Deutsche Börse Drops Euronext Takeover Bid, Clearing Way for NYSE GroupInternet Coalition Challenges Exchanges Over Exorbitant Data FeesWhat Is The Price of Real-Time Worth?NYSE Eyes Joint Venture with Toyko Stock ExchangeU.S. Exchanges Continue To Trim Expenses Through Consolidation, M&A ActivityWhy I'm Long-term Bullish on the Exchanges