SCHW Charles Schwab Corporation

By Alexander Osipovich 

Investors won't necessarily benefit when the New York Stock Exchange and other market operators welcome traders back to their closed floors, new research suggests.

An academic study released Thursday found that NYSE's crucial 4 p.m. auctions, which determine end-of-day prices for thousands of stocks, ran more smoothly after the Big Board closed its floor to curtail the spread of the coronavirus. NYSE has questioned the study's conclusions.

The floor closure, which began March 23 and ends next week, is the first time in NYSE's 228-year history that it has operated in all-electronic mode. It has prevented floor brokers from executing trades in the auctions, one of the few times of the day when humans on NYSE's floor still play a significant role.

Meanwhile, brokerages such as Charles Schwab Corp. say individual investors have gotten better prices on trades in a popular options contract since Cboe Global Markets Inc. shut its Chicago trading floor on March 16 to combat the pandemic.

The new data casts fresh doubt on the value of old-fashioned trading floors, just as exchanges are moving to reopen them. NYSE plans to reopen its floor Tuesday, while Cboe says it could reopen its floor as soon as June 1.

Only a few exchanges still have floors, including Cboe, the Chicago Mercantile Exchange, the Intercontinental Exchange Inc.-owned NYSE and the London Metal Exchange. Almost all trading -- from stocks to Treasury bonds to cattle futures -- can be done electronically, with computers lining up buyers and sellers. But proponents of trading floors say they provide a valuable service, by funneling trades into one place and allowing traders to exercise human judgment about how to execute them. That can be especially useful for larger and more complex transactions, floor traders say.

Open-outcry trading floors emerged centuries ago as places where traders could haggle over securities and commodities. Traditionally, floor traders enjoyed perks unavailable to those elsewhere, such as quicker access to information and the ability to collect fees from firms sending orders to the exchange.

The rise of electronic trading put many floor traders out of business. Advocates of electronic exchanges say they are fairer than the floors they replaced.

For ordinary investors, the closure of NYSE's floor was a nonevent. But it changed the way big traders participate in the exchange's closing auctions, which have grown in importance in recent years as Wall Street has increasingly used them to execute big trades. Nearly 7% of equities-trading volume this year has occurred in closing auctions at NYSE, Nasdaq Inc. and elsewhere, according to brokerage Rosenblatt Securities.

When NYSE closed its floor, firms could no longer use "D orders," a popular way for traders to buy or sell large quantities of NYSE-listed stocks in the closing auctions. Under NYSE rules, such orders must be routed through a floor broker, and they can be entered throughout the day, until 10 seconds before 4 p.m. That gives traders greater flexibility than they have at Nasdaq, which imposes stricter limits on closing-auction trades after 3:55 p.m., but it can fuel price swings in NYSE stocks during the final minutes.

In Thursday's study, researchers at New York University and the University of Illinois at Chicago found that closing the floor made the process more orderly. NYSE's "indicative" auction prices, which are meant to give investors a sense of closing prices for stocks, grew more accurate: The gap between 3:55 p.m. indicative prices and actual closing prices narrowed by about 1%, the study found.

Traders also tended to join the auctions earlier, potentially damping big moves at the end of the day. Before the floor closed, only 46% of NYSE closing-auction volume was matched -- or paired off between buyers and sellers -- by 3:55 p.m. That jumped to 74% after the closure, the study found.

"These improvements in closing auction market quality on NYSE are especially notable given the widespread market turmoil during the Covid-19 pandemic," the researchers wrote.

NYSE says the study missed the point and didn't look at better ways to measure the quality of its auctions.

"This flawed study ignores real-world investor outcomes," NYSE Chief Operating Officer Michael Blaugrund said. "The only credible conclusion from analyses evaluating the best outcomes for investors is that the NYSE closing auction, in conjunction with its trading floor, leads to the fairest prices for investors."

Meanwhile, Cboe's floor closure saved money for investors in S&P 500 options, according to brokers and data from Citadel Securities, one of the biggest electronic trading firms in options markets. S&P 500 options pay off if the index rises above or below certain levels, allowing investors to bet on or hedge against market swings. They gained popularity during this year's elevated volatility.

In the first half of March, investors trading 100 or fewer S&P 500 options -- a size often associated with individual investors -- traded at prices slightly worse than those publicly posted by options exchanges, costing them an average $1.46 per order, according to Citadel Securities data. In the second half of March, with the floor closed, that flipped into a savings of $98.54 per order, the data shows.

The reason for the striking difference: When it closed its floor, Cboe activated a mechanism that lets investors get better prices for S&P 500 options than those publicly posted, by routing their orders to auctions where electronic trading firms compete to execute them at better prices.

Brokerages that cater to individual investors welcomed the change.

"We've seen a meaningful improvement in execution quality for retail-sized [S&P 500] options contracts since Cboe has gone all-electronic," said Jeffrey Starr, a senior vice president at Charles Schwab. "It is certainly something that we'll be monitoring closely going forward."

Cboe says it is looking at making the change permanent when it reopens its floor. "That's been a great outcome for retail," Bryan Harkins, co-head of Cboe's markets division, said in an interview this week. "We're going to preserve the experience that they've come to enjoy."

--To receive our Markets newsletter every morning in your inbox,

click here

.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

(END) Dow Jones Newswires

May 21, 2020 05:44 ET (09:44 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.