NYSE Specialists Face Criticism As Anachronism In 21st Century; NYSE Defends System.(A)

Byline: KEN HOOVER

With Richard Grasso out as NYSE chairman after a furor over his $140 million pay package, major changes are expected in how the exchange is governed.

But critics say the NYSE's problems run deeper than the make-up of its board of directors, or its pay practices or its disclosure rules. They say the specialist system is a dinosaur, rendered obsolete and unfair by electronic trading systems, such as the Nasdaq and ECNs.

For nearly two centuries, specialists on the NYSE floor have maintained a continuous auction in the stocks assigned to them. Floor brokers, called the crowd, gather around the specialist's post to trade.

By contrast, Nasdaq market makers compete for trades in an electronic marketplace, hoping to profit from the spread between the bid and ask price.

ECNs, which match buyers and sellers in much the manner of eBay, have taken market share away from Nasdaq. They now account for about 30% of Nasdaq's daily volume, but only 7% of the NYSE's volume, according to Celent Communications, a Boston consulting firm.

Exchanges in London, Paris and Tokyo have abandoned floor-based systems in favor of virtual marketplaces.