This information memo lays out very thoroughly (13 pages) and in simple-enough-that-even-Pellecchia-will-get-most-of-it language the major changes in the NYSE trading model we’ve been talking about lately on this humble blog.

Topics include:

– Enhanced reserve interest capabilities;
– Designated Market Maker (DMM);
– Priority and Parity;
– eQuotes to OpenBook;
– d-Quote enhanced functionality; and
– Elimination of CAP (Convert and Parity) orders.

When I say “thorough,” I mean that the DMM section alone includes the following parts:

– Transtion from Specialists to DMM and DMM Units;
– DMM and DMM Unit Obligations;
– DMMs retain an affimative obligaton;
– DMMs no longer have a negaive obligation;
– DMMs are not the “responsible broker dealer” for agents’ orders;
– DMMs have Depth Guidelines and Minimum Quoting Requirements;
– DMMs retain stabilization requirements;
– Information available to DMMs;
– Handling manual transactions;
– DMM Interest and DMM Capital Commitment Schedule;
– DMM Interest and DMM Algorithms;
– Limitations on the Execution of DMM Interest;
– Capital Commitment Schedules (CCS);
– Execution Logic for Trades Involving CCS Interest; and my personal fave:
– Using CCS Interest for Price Improvement.

You get the idea. I think there’s a lot of useful info here, and I’ve been trying to to think of a way to break it out somehow, but until that scheme comes to me, preferably with a slathering of cranberry sauce, here’s the whole kit and caboodle.

In the meantime, I hope you and yours truly enjoy your Thanksgiving.

If you’re interested in what’s going on from a competititve standpoint at the New York Stock Exchange and at parent NYSE Euronext, quit reading this stupid blog and pick up the November issue of Institutional Investor, which has two articles you might want to see. Note, both of these links are subscription-only:

1) Up Off The Floor, which looks at the impact to date of the new changes in the NYSE trading model. Excerpt:

After two centuries of dominance, the exchange was steadily losing ground, surrendering crucial market share to electronic rivals; a decade ago, according to Edward Ditmire, a stock analyst at Fox-Pitt Kelton, 80 percent of the daily trades in shares issued by companies listed on the NYSE were executed at NYSE. In October that figure was 42.8 percent. The good news, though, is that NYSE Euro­next gained share in September, reversing a year-long slide. The market share for October was up from 41.9 percent in September, which was up slightly from 41.4 percent in August. ­That’s still well below the 59.8 percent it logged at the end of 2007, but at least the decline has been reversed. Exchange officials are encouraged to think that in a time of extreme stress traders are turning to them. “This difficult environment is giving us a chance to prove our value to all our clients,” says Lawrence Leibowitz, head of U.S. execution and global ­technology.

Further, exchange officials say that overall numbers reflect even greater strength during the most critical periods of the day, when prices are set. “We are now transacting the lion’s share of the trading business during the open and closing hours of the market, because we are able to handle those volumes at a time when other markets seem too nervous to quote in size,” [CEO Duncan] Niederauer ­says.

Adds the managing director of trading operations at one bulge-­bracket firm: “Sometimes it feels as if the stock exchange is the ­only place that I can count on to act the way it’s supposed to.”

Niederauer still faces difficult challenges. The core business is under assault by digital technology, deregulation and globalization, and the company needs to find new sources of revenue and growth. “There ­aren’t many companies that have ever gone through such a massive transformation. The problem they face today is that they have to take all the raw material they have and make it work properly,” says ­Ditmire.

I can’t vouch for those market-share numbers; they sound to me like NYSE and NYSE Arca combined rather than NYSE stand-alone. I do see that the NYSE Trading Floor is participating more, reversing a long trend of decline. The rollout of our changes is still in progress and I’m cautiously optimistic about the impact, but I also want to note that as I’ve said before, what we’re doing is not a panacea for everything that ails today’s fragmented, hyper-competitive, highly automated, penny-increment markets.

2) Trading Costs Are Rising is based on Elkins/McSherry’s annual survey of all-in trading costs at markets and firms around the world. For at least the third consecutive year, the survey finds that NYSE-listed stocks have the lowest trading costs of any in the world. Excerpt:

The NYSE, the flagship of multinational giant NYSE Euronext, now trades a minority of its own listed shares, as the liquidity has shifted to the Nasdaq and alternative venues, but the NYSE has done its part to push institutional trading efficiency. Handling more than 500 million shares a day in blocks of 10,000 or more, the NYSE is “still the largest block destination on the Street, but we ­don’t always get ­credit for that,” says Joseph Mecane, the Big Board’s executive vice president and chief administrative officer for U.S. markets. Stealing some of that thunder are block-­execution specialists like Fox River, Liquidnet and Pipeline Trading Systems, all ranking high in Elkins/McSherry’s brokerage league tables in terms of bettering ­global benchmark averages.

Not only are NYSE-listed stocks cheapest to trade, but the cost continues to decline, year after year:
2008: 13.89 basis points
2007: 14.80
2006: 17.51
2005: 23.26
2004: 25.87

Happy Friday, folks. A morning injection of historical trivia: how many of you were around for the following?

Today in NYSE History (NYSE.com)
21 Nov. 1983 — The stocks of the seven “Baby Bell” companies - spun-off in the AT&T divestiture - began trading, adding 1.5 billion shares to the list in a single day.

Another bit of good news that came out yesterday is that effective Monday, Nov. 17, NYSE will no longer need to halt stocks whose price falls below a buck and route any orders in those stocks to our sister NYSE Arca platform.

We’ve changed our system to be able to recognize sub-penny prices at which other markets might quote those stocks, so we can route to those markets if appropriate, as required by Reg. NMS if another market posts a better price.

Just to be clear: these halts were for operational reasons, as distinct from a regulatory halt that is implemented when a company’s stock no longer meets our listing standards. All of these continued throughout to be listed on NYSE; they were just traded on our NYSE Arca platform because of this operational reason.

The details of the change are in this NYSE Trader notice, along with a link to the list of affected stocks and the rule filing about this change.

Hey, I forgot the historical trivia in my post earlier today! Our switchboard has been flooded with complaints, people have been threatening to cancel their subscriptions, and…wait…what’s that? We don’t have a switchboard?

Ahem. Anyway. To put the world right again:

On This Day (NYTimes.com) in 1972, the Dow Jones Industrial Average closed above 1,000 for the first time.

The Times’ article about the event, which is worth reading as a historical artifact, recounts:

At 3:29 P.M., red light bars flashed on above and below each of the time clocks surrounding the trading floor of the New York Stock Exchange. This was the traditional visual signal to show that one minute of training time remained. At the same moment, a bell began clanging on the speaker’s rostrum - the auditory warning.

Traders, brokers and clerks on the floor - aware that history was in the making - broke into cheers that lasted about 20 seconds. Some paper was tossed in the air and drifted down like confetti.

Several hundred persons on the floor then turned to face newsreel cameras grinding away on the member’s gallery, some brokers waving like fans at a football game.

Big Board volume also gave the exchange community something to cheer about. It rose to 20.20 million shares, picking up the tempo as prices climbed.

An office broker, watching the stock tape from his desk downtown, murmured in wonderment: “There’s a sort of renewed confidence in the whole economic outlook.”

That confident outlook would soon be stomped by the bear market of 1973-74.

Yesterday, NYSE completed the rollout of Phase 1 of our next-generation market model, and began Phase 2.

For those tracking these changes, here is the complete list of issues and when they joined Phase 1.

Now, for all of our issues:
– Designated Market Makers trade on parity with others, and no longer act as agent (as Specialists did) for orders on the limit-order book. DMMs are now paid based on their quoting and trading performance;
– Customers now have a choice of two types of reserve orders: Dark Reserves, which are completely hidden to the DMM and are available to trade with all electronic orders; and Block Reserves, which are eligible for price discovery on the Trading Floor and have a requirement of at least 100 shares displayed.

In Phase 2, DMMs’ electronic responses to incoming orders will be pre-programmed into a Capital Commitment Schedule that will be part of the DispIay Book. When fully implemented, this will reduce order latency by as much as a third and will eliminate what little is left of the advance look at incoming electronic orders.

We aim to complete this phase in early December. My understanding is that we won’t publish a list of Phase 2 stocks — this phase involves no change of action on the customer’s part — but we’ll keep you apprised of progress.

On a personal note, if you’re wondering why the market fell sharply yesterday and then rallied back even more sharply, with the Dow ending up more than 500 points after a 900+-point swing, I don’t know, but it has NOTHING TO DO with the fact I had the day off. Really. I swear. I’m not going there again.

As the New York Stock Exchange continues the rollout of our next-generation trading model, and recognizing that we’re making significant changes, I thought it might be useful to summarize the main roles and responsibilities of each of the three key market participants: Designated Market Makers (who have succeeded Specialists); Trading Floor Brokers, with their new tools; and the new Supplemental Liquidity Providers.

Designated Market Makers
Designated Market Makers (DMMs) are at the center of the NYSE market and are the only participants in any market who have true accountability for maintaining a fair and orderly market. DMMs:
• Convene both a physical auction convened by DMMs and a completely automated auction that includes algorithmic quotes from DMMs and other market participants;
• Have the obligation to maintain an orderly market in their stocks, quote at the national best bid or offer a specified percentage of the time, and facilitate price discovery at the open, close and in periods of significant imbalances;
• Provide price improvement and match incoming orders based on a pre-programmed Capital Commitment Schedule, which has been added to the NYSE Display Book, minimizing order latency. DMMs and their algorithms do not receive a “look” at incoming orders. This ensures that an intermediary does not see orders first, and that DMMs compete as a market participant;
• Are on parity with quotes from floor brokers and those on the Display Book, encouraging DMM participation and higher market quality.

Trading Floor Brokers
Brokers on the NYSE Trading Floor leverage their physical point-of sale-presence with information technologies and algorithmic tools to offer customers the benefits of flexibility, judgment, automation and anonymity with minimal market impact. Trading Floor Brokers:
• Have parity with DMMs and the NYSE Display Book, no matter whether the Broker’s order is represented physically or via an algorithm or e-Quote. That is, they can join the first displayed quote on the Book, and split stock with that order.
• Have the ability to route all or part of a customer order to an external algo engine from their handheld order-management device. These algorithms offer Floor Brokers the ability to provide customers with additional execution capabilities in an environment that offers a balanced combination of technology for fast, automated and anonymous order execution; and a physical marketplace for discovering block-sized liquidity and improving prices.
• Can utilize a technology feature called Block Talk to more efficiently locate deep liquidity. Block Talk is designed allow Floor Brokers to broadcast and subscribe to specific stocks they have an interest in, creating an opportunity to trade block-sized liquidity that is not accessible electronically. Since the messages contain no specific order information, customers benefit from a discovery process in a secure environment free of impact, information leakage or intermediation.
• Also have the ability to identify via their hand-held order-management system the last five buyers and sellers in a stock by badge number. They can message a specific member that they are in touch with the contra side. This is valuable information for pricing blocks, as it is about real buyers and sellers, not indications of interest.
• Have a special feature with their reserve orders: when the displayed amount is exhausted, reserve interest replenishes on parity. In contrast, the “upstairs” reserve order functions as it does in an electronic market: replenishing at the back of the queue.
• Are positioned to act on the expanded imbalance and indication information at the open and close of the market. They can participate as agent, or convey insight into the open or close for customers’ decision making.

Supplemental Liquidity Providers
Supplemental Liquidity Providers (SLPs) are upstairs, electronic, high-volume members incented to add liquidity on the NYSE.
• The pilot SLP program rewards aggressive liquidity suppliers, who complement and add competition to existing quote providers.
• SLPs are obligated to maintain a bid or offer at the National Best Bid or Offer (NBBO) in each assigned security at least 5 percent of the trading day.
• The NYSE pays a financial rebate to the SLP when the SLP posts liquidity in an assigned security that executes against incoming orders. This generates more quoting activity, leading to tighter spreads and greater liquidity at each price level.
• SLPs trade only for their proprietary accounts, not for public customers or on an agency basis.
• An NYSE staff committee assigns each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue.
• A member organization cannot act as a Designated Market Maker and SLP in the same security.
• SLPs have the same publicly available trading information and market data that all other NYSE customers have available to them.

These descriptions and other updates and information will be posted on our Web page.

Thanks for reading, and as always, welcome your comments.

Today in NYSE History (NYSE.com)
12 Nov. 1879 –Forty new memberships were created to raise funds to enlarge the NYSE’s building, bringing the total number of exchange members to 1,100.

I suppose that need for space ultimately led to a new NYSE building, opened in 1903 and later expanded, which is the place from which your humble blogger writes these words. And actually gets paid for it!

My MMC (magazine-marketing colleague) Meredith Elliott writes:

With all the headlines centered on the latest financial crises, it can be challenging to maintain a balanced outlook on the state of affairs in global business. Fortunately, the 4Q issue of nyse magazine reports on some positive developments.

Our cover story on Medco Health Solutions (MHS), the largest pharmacy benefits manager in the U.S., tells how the company is changing health care to leverage the efficiencies and technologies of the 21st-century world. By transitioning paper prescriptions to electronic fulfillment, Medco says a drastic reduction in human error and improvement in patient safety is realized. Medco’s significant investment in the field of pharmacogenomics is helping doctors better understand what medicines will and will not work for patients prior to popping one pill.

Many of us are tightening our wallets this holiday season, yet still hope to spend it traveling to visit family. Orbitz Worldwide’s (OWW) new initiative, “Price Assurance,” will reimburse any Orbitz customer the difference in their travel ticket should it be found cheaper on another site. Find a better deal elsewhere? Find a check in your mailbox.

In our first-ever country spotlight, learn how things are heating up in our neighbor to the north’s economy. In “All Eyes on Canada” an abundance of natural resources is helping Canada to propel global businesses for decades to come. The Canadian economy is a diamond in rough times and, not surprisingly, home to NYSE listed companies such as Cameco Corp (CCJ), Thomson Reuters (TRI) and Nortel Networks (NT).

The Technovations feature focuses on some of the largest energy projects underway in the U.S. The demand for energy is predicted to increase by 40 percent in the next 20 years. Royal Dutch Shell (RDS), Sierra Pacific Resources (SRP) and Siemens AG (SIE) are several companies putting their money where their minds are and embarking on new innovative projects to produce cleaner, more efficient energy.

Hope you enjoy the issue, and we welcome your thoughts.

If electronic prescriptions means no more trying to decipher my doctor’s hieroglyphic handwriting, I’m all for it. And pharmacogenomics? New to me. Thanks for the rundown on the magazine, Meredith.

For those who keep up with this stuff (and may I say, bless you and thank you), here are a few links to reference information about the rollout of the next generation of New York Stock Exchange. Hope it’s of some use, and apologies for not pulling this together sooner. The world is turning too fast for this old analog guy.

Various reference information, including technical specifications, notices of changes for Liquidity Replenishment Point parameters for individual issues and the list of issues that are in sub-penny trading halts on NYSE.

Also included on the page above is the list of participating stocks for the first phase of this rollout, which I break out separately here because of all the interest in the list. Note, in this first phase, Specialists become Designated Market Makers (DMMs) and can trade on parity with others; and customers are able to send reserve orders with no displayed amount. The next phase will come later this month, when DMMs being doing their electronic participation via a pre-programmed Capital Commitment Schedule.

Overview page for NYSE equities trading, a good start page from which to get to all of the above; we’ll soon be adding more material to this page explaining each of the roles of the Designated Market Makers, Trading Floor Brokers and Supplemental Liquidity Providers.

Basic fact sheet on the changes in the market model.

Updated guide to order types.

SEC approval order of the enhancements to the NYSE market model.

NYSE’s original rule filing for the enhancements, plus amendments 1, 2 and 3.

And last but not least (because it’s my day job and I need that gig), the press release announcing the SEC’s approval.

That’s it for now; will update you with future developments on that front.

On the historical-trivia front, today is Ida Tarbell’s birthday (born 1857; died 1944). If you don’t know who Ida Tarbell was, check out her New York Times obit. Her “History of the Standard Oil” and the work of other muckrakers left a lasting impression on me when I was in college back in the previous millennium.

If you love newspapers and markets (as does your humble blogger), and in particular love newspaper photos of markets, you’ll enjoy Picturing the Crisis: A look at photographic coverage in the financial press (CJR.org), in which the Columbia Journalism Review assesses who has had the best photos of the financial crisis: the Financial Times, New York Times or Wall Street Journal?

I’ll stay out of that horse race, because although I’m a PR guy I’m not quite that stupid.

But of course many of the photos are from the NYSE Trading Floor, and my colleagues and I have worked with many of the photographers who have worked the story, so I do immodestly feel qualified to comment on a couple of aspects of the story.

Excerpt:

Moving along, we’d like to register a complaint about what has become a key element of the iconography of the credit crisis: traders with their heads in their hands, or in other poses of distress. Such photos are always a staple of down markets, and this one is no exception. Most of them are forgettable, and we wish editors would think twice before putting them on the front page.

My take is that the head-in-hands photos are only a small subset of what the photographers are actually shooting. If you look at the online news sites and photo aggregation sites, you’ll see many more photos, and much more variety.

Then why do the cliched photos continue to be chosen for newspaper front pages?

Maybe it’s that the editors are looking for a photo that will give the reader a shorthand way to know what’s happening. The reader sees a chart pointing down, a photo of a trader with head in hands, and the reader immediately knows what kind of a day it was in the market. I hope editors will also remember that fans of newspapers and markets look to papers for compelling, different photos to go along with in-depth, insightful articles. Give us something that grabs us and draws us in.

One other comment: this article and others raise the fact that certain NYSE traders tend to be photographed again and again. I’ve seen one blog even question whether a trader was seeking the spotlight. The fact is that most of those who get photographed time and again happen to have their trading desks or booths directly next to the gallery from which photographers often shoot. That’s not the fault of the traders or the photographers, and to mix things up we’ve been giving more photographers greater access to the entire floor.

Of course, the business-cliche watch is not exclusive to images; in Cliche Watch (Business Edition), New York Times deputy news editor Philip B. Corbett flags some too-oft-written words about finance, including investors doubling down; firms on the hook; and the United States being divided into just two streets: Wall and Main.

For those of you who ask me what the NYSE Trading Floor has been like lately, here are two slice-of-life articles that I would recommend:

This Land: Financial Foot Soldiers, Feeling the World’s Weight (NYTimes.com) Excerpt:

Not long ago, a floor broker named Danny Trimble cocked a finger to his head and placed it against his temple, for reasons unrelated to the market; soon an image of Mr. Trimble “shooting” himself made the newspapers. No matter that he is not a hedge fund manager, bank C.E.O. or fat cat; no matter that he is just a financial foot soldier from Jersey, hoarse from shouting at his son’s Pop Warner football games.

Mr. Trimble, 41, works at the edge of the exchange’s main floor, shoulder to shoulder with six other men in a booth the size of an elevator car. Not everyone graduated from college, but all are resident scholars of the hurly-burly floor, educated in reading markets, hunting for matches and executing buy-and-sell orders. They are worth their commissions, they say, because they provide things a computer cannot, things like experience, intuition — a “feel.”

IMPACT: Hopes, fears collide in another day - hardly ordinary - on NYSE’s trading floor (Associated Press, via StarTribune.com) Excerpt:

There was only one certainty. This would not be an ordinary day on the floor. There are no ordinary days here anymore.

The electronic board showed investors were betting on stocks to open near the previous day’s close, a good sign. Now it was up to Frankel and his trading floor compatriots to figure out whether yesterday’s brief exhilaration signaled the edge of the oasis a parched Wall Street had been searching for, or just a cruel mirage.

“That’s the million-dollar question,” Frankel said.

But for now the only answer was the sound of the opening bell.