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New York Stock Exchange's new payment schedule for specialist firms could cut their net profits from market making by more than half after the first six months, traders said. NYSE recently eliminated specialist commissions, reverting to a revenue sharing arrangement and fee waivers to compensate specialists for their services. The seven specialist firms have earned a combined $125 million a year in fees. For the first six months NYSE will give the specialists roughly the same payout they would have gotten under the old scheme. After the first six months of the new revenue sharing deal, the NYSE will pay them based on market share in stocks they specialize in. If the NYSE floor maintains roughly 60% market share of 2.5 billion NYSE-listed shares traded daily, specialists can expect to receive a combined $30 million a year. The NYSE will continue to waive roughly $20 million a year in specialists trading fees.
"We want to pay them for making our market better," John Thain, ceo of NYSE Group, said at a conference last week, adding that the specialists will be rewarded for providing liquidity and building market share, among other things. Upstairs traders, however, said they were surprised the specialists got as much as they did. Specialists participate in roughly 5% of trading in hybrid securities so far. Increasingly, specialist firms have been shifting to market making on other exchanegs to make up for lost revenue (WSL, 4/28).
