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And The Walls Came Tumbling Down - NYSE Seeks Unlisted Trading Privileges for ETFs

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Long a virulent opponent of unlisted trading privileges, the New York Stock Exchange (NYSE) has finally given in. The Big Board announced that it would be seeking unlisted trading privileges for the SPDRs S&P 500 fund (SPY), the Nasdaq 100 Trust (QQQ), and the Diamond Trust Dow Jones fund (DIA).

"The addition of these products to the NYSE will open them to the deepest pool of liquidity in the world. This will enhance the product's desirability to both institutional and retail customers," said NYSE Chairman and CEO Richard A. Grasso. "Our intent is to trade ETF products, such as the Nasdaq 100 Trust, Standard & Poor's Depository Receipts and Diamonds Trust, that are listed on other markets and not the individual companies that are in the underlying index and may not be listed on the NYSE."

For many years, pride has come ahead of the bottom line at the NYSE. Other exchanges, most prominently the Chicago Stock Exchange and the Nasdaq, along with an array of electronic clearing networks (ECNs), have chipped away at some of the NYSE's volume by listing its stocks. Despite that fact, the exchange has long refused to budge, citing opposition to fragmented markets, even as its hegemony faded.

While the move is an attempt to capture some of the AMEX-listed ETF market share, "it is a clear signal, straight from the top, that the NYSE is serious about its intentions to become a player in the ETF business," says Herb Blank, President of QED Associates in New York and noted ETF expert.

The announcement is a direct attack on Nasdaq and the American Stock Exchange (AMEX), which merged in 1998 and trade many NYSE stocks. The very fact that the NYSE has made the move, however, signals the tremendous popularity and growth that ETFs are enjoying.

As Joe Keenan, Vice President of Exchange-Traded Products at the Bank of New York (fund manager for both the Nasdaq 100 Trust and Mid-Cap SPDRs) noted, "My initial reaction was 'good news for ETFs.' Once again it proves that everyone wants to be actively involved in these products. From a service provider perspective, I think it will just make these things even bigger and better, with greater competition reducing spreads and improving pricing."

One interesting sidelight is that the NYSE is going to put itself in a position where it is forced to pay licensing fees to its direct competitor (Nasdaq) in order to trade the Cubes (QQQ). One industry expert also noted that it is possible that the AMEX may be forced to allow payment for order flow to protect its volume.

Of course, the plan would most directly affect the AMEX, because the three ETFs the NYSE plans to list are far and away the three most heavily traded AMEX issues by volume. For some idea of just how important ETFs have become to the once flagging AMEX, take a look at one day's trading volumes:

AMEX Trading Volume for April 6, 2001 - Top Ten Listing by Volume
Name Ticker ShareVolume Type of Issue
NASDAQ-100 Index Tracking Stock
QQQ
42,023,200
ETF
SPDR Trust Series I
SPY
11,030,600
ETF
DIAMONDS Trust Series I
DIA
4,119,600
ETF
Select Sector SPDR Fund - Financial
XLF
2,301,800
ETF
Nabors Industries, Inc.
NBR
1,626,300
Security
IVAX Corporation
IVX
1,031,300
Security
MidCap SPDR Trust Series I
MDY
797,200
ETF
iShares Russell 1000 Growth
IWF
670,800
ETF
Devon Energy Corporation
DVN
621,500
Security
Global Light Telecommunications Inc.
GBT
346,000
Security

Before the NYSE press conference on April 6, 2001, The Wall Street Journal had reported that a person familiar with the matter stated that the filing of the application was "imminent." The story broke on the Forbes Web site sometime after the NYSE approved the plan at a board meeting in Washington on April 5.

The NYSE noted that SEC approval is not necessary for the unlisted trading privileges, but that it would file amendments to certain of its rules with the SEC to facilitate trading. The process of approval and implementation is not expected to take long, and the 3 ETFs should be trading on the NYSE in the near future.

To find out more about exchange-traded funds, go to the ETF Zone.