• Automated traders now oversee nearly all NYSE floor trading
  • `It gives them legitimacy,' according to industry analyst

Automated traders have an image problem. What better way to address it than to set up shop in one of the most iconic spots in global finance: the floor of the New York Stock Exchange.

QuickTake Trading on Speed

Citadel Securities and Global Trading Systems LLC recently agreed to buy NYSE floor-trading businesses, putting their computers on the same team as humans working at the lower Manhattan facility. They’re joining other automated market makers, Virtu Financial Inc. and IMC, who now oversee nearly all transactions on the floor.

“It gives them legitimacy,” said Rich Repetto, an exchange and brokerage analyst at Sandler O’Neill & Partners LP. “Now they have obligations to the floor and stock issuers. It isn’t purely about them and their proprietary trading.”

The floor offers a kind of exposure to the public and stock-issuing corporations that isn’t available anywhere else. The traders often appear in financial media, where viewers can catch a glimpse of their blue jackets emblazoned with their employers’ names. And though the floor sees a fraction of the business that it once did, human market makers still play a critical role there: making sure stocks open and close for the day, and ensuring newly public companies get off to a smooth start.

Loud Critics

Attacked for years by some brokers, investors, politicians and authors who argue they have unfair advantages, automated traders -- often dubbed “high-frequency traders” -- are opening up and trying to improve perceptions about their businesses.

Virtu, co-founded by the former chairman of the New York Mercantile Exchange, is now letting outsiders use its algorithms to execute trades. An advocacy group called the Modern Markets Initiative, which is backed by four firms including Global Trading Systems, comments on trading topics -- a departure from a few years ago when the industry was mostly silent.

Once their deals close, GTS and the market-making division of Citadel LLC will each oversee the trading of more than 1,000 securities. Along with Virtu and IMC, the high-speed traders will have a chance to build relationships with the listed companies whose stocks they manage.

Maintaining Order

Firms running market-maker businesses on the NYSE floor are tasked with maintaining orderly buying and selling for the stocks they handle. They face financial requirements and vetting by NYSE and publicly traded companies.

NYSE imposes capital requirements on the designated market makers, requiring that they collectively set aside $125 million to back their trades, according to the exchange. No firm can contribute less than $1 million to that pot of money.

Before a corporation lists its stock through an initial public offering, they interview and select the designated market maker that oversees their shares. NYSE requires the company and its trader to speak regularly.

“What’s unique about NYSE is it’s the only market that still has humans, and the issuers love that,” said Ari Rubenstein, the chief executive officer of GTS who began his career on a commodities trading floor in New York.


“A big factor in electronic market making is trust,” he added. “The electronic market maker of tomorrow is not only one that has great tech, but can also can be trusted to trade electronically in a way that is going to be beneficial to markets.”

Big brokers like Goldman Sachs Group Inc. and Bank of America Corp. once ruled the NYSE floor. Over time, as regulation and technology hurdles steepened, the banks sold their floor operations. Once GTS’s purchase of Barclays Plc’s NYSE business closes in the second quarter, no bank will have a designated market maker operation on the floor.

Jamil Nazarali, head of Citadel Execution Services, said that firms like his are better equipped technologically than banks to handle market making at NYSE.

“The equity markets are nearly completely automated, and the banks just don’t have the market-making capabilities we do,” Nazarali said. “It’s not an accident that the banks have left the floor.”

After purchasing Cohen Capital Group’s floor business in 2011, high-speed trading firm Virtu went on to become a publicly traded company last year. A presence on the floor can be a stepping stone for market-making companies en route to an IPO of their own, and a way to build clout with institutional and retail investors, said Sang Lee, an analyst at Aite Group.

“If you’re in financial services, you want to emphasize you’re highly efficient and technology driven, but at the same time, you’re accepted and you’ve become part of the existing structure within financial services,” said Lee. “And what’s more traditional than becoming part of the NYSE floor?”

IMC, Citadel and GTS are all privately held companies currently. Rubenstein said GTS has no current plans for an IPO. Zia Ahmed, a spokesman for Citadel, and Dave Carlson, a spokesman for IMC, declined to comment.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE