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John Lyden: Big Board Specialist in Times of Criticism

January 29, 1990

NEW YORK (AP) _ John Lyden pops a Certs amid the constant din of ringing bells, ripping paper and shouting traders on the floor of the New York Stock Exchange.

As a specialist at the Big Board, the nation’s largest stock exchange, Lyden’s job often requires close contact and rapid-fire discourse. Breath mints are mandatory.

But some securities professionals are questioning whether the job of specialist - the middleman who ensures fair and fluid buying and selling of stocks - will be necessary in a future dominated by computerized trading.

″They’re a horse-and-buggy institution in a jet-propelled world,″ said Robert Sobel, a business history professor at Hofstra University. ″Technology has made them obsolete.″

Bunk, say Lyden and other proponents of the specialist system, which has been in place since after the Civil War.

Under the system, specialists receive what amount to lucrative franchises in handling particular stocks in exchange for setting opening prices and keeping trading orderly. Specialists sell from their own inventory when other sellers are scarce and buy when buyers can’t be found.

Last week, a draft report by an independent congressional agency described the specialist system as ″faltering″ and said the human operation was outmoded by the capabilities of new technology to match buyers and sellers.

Academics and Wall Street officials advising the Office of Technology Assessment slammed the report, which questioned fundamental practices in the stock and futures markets, including the role of specialists.

Lyden, who has worked on the exchange floor for 30 years, following his father’s 42 years, undertook his own defense from the NYSE floor.

″The exchange is the only place in the world where common stocks are traded in the sunlight, totally in the sunlight,″ Lyden, 55, a senior partner in the specialist firm Nick, Lyden & Co., said in an interview.

″We feel if you put all the supply and demand together at one particular time in one particular place you get a fair price,″ he said. ″And by a fair price I mean integrity.″

″No one will make a trade in a phone booth, no one will make a trade in a closet, no one will make a trade under the Brooklyn Bridge,″ said Lyden, whose firm holds franchises in 28 stocks including Humana Inc. and Shawmut National Bank.

With the looks and sincere speech of a B-movie leading man, Lyden is a commanding presence on the floor, and a historical one too. His father, Ken, worked on the exchange floor from age 16 until his death at age 58 in 1965, moving up from gopher to telephone clerk to specialist. He even played on the NYSE’s baseball team.

After graduating Brown University and New York University’s business school, John Lyden joined Irving Trust bank on Wall Street. At his father’s funeral, he was asked by one of Ken’s younger partners, a pallbearer, to come to the exchange.

″My dad died of a heart attack,″ Lyden said, standing in the middle of the exchange’s soaring main room near an idle clerk flicking order cards. ″I never had an inclination to be here...I came into the business at the age of 30 not knowing a buy order from a sell order.″

Lyden said specialists have three roles: to ″make markets″ for individual stocks by pairing buyers and sellers, to generate action in less heavily traded stocks and to trade for their own accounts.

More than 400 NYSE specialists at 49 firms make money through commissions for handling trades and by trading stocks for themselves. With soaring volume the last decade, specialists now generate about 75 percent of their income from commissions.

But specialists are involved in about 12 percent of NYSE trades. Brokers who take orders at banks of yellow telephones on the floor often trade with other brokers at a stock’s post; in those cases specialists serve as traffic cops, making sure the trade is properly recorded.

If there is no buyer or seller, the specialist records the order in his ″limit order book″ and awaits a corresponding transaction. Or, the specialist will step in and complete the trade to keep the market active.

In a purely electronic system, such as the the National Association of Securities Dealers Automated Quotation system, traders set prices and computer programs match up and execute trades.

″We feel that everybody in the marketplace, whether they’re a retail customer or an institutional customer, gets a fair price,″ Lyden said. ″You don’t necessarily do that if you’re dealing with a black box.″

The current fuss over the specialist system stems in part from the October 1987 stock market crash, when an avalanche of sell orders threatened to put the specialists under. That day, specialists made $485 million in net purchases and the market stayed open.

Still, some specialists were reluctant to buy stocks because of uncertainty. Others who spent enormous amounts of borrowed money to buy stocks faced credit crises with their banks. A few went out of business.

A Securities and Exchange Commission report on the crash praised the system for helping prevent an even worse disaster. The report said traders of over- the-counter stocks simply didn’t pick up the phone that day. Some automated execution systems didn’t function.

″Market professionals have long agreed that a market cannot work without negotiation,″ NYSE President Richard A. Grasso said in a cover letter to his sharp critique of the congressional agency draft report, which was sent back to the drawing board because of complaints of shoddy research and unfounded conclusions. ″Full automated trading systems have been doomed to failure.″

Said Lyden: ″You might not like what happaned, that the market was down 508 points, but at least you had a place to liquidate if you wanted out.″

To better ensure that specialists can meet extraordinary volume orders, the NYSE increased capital requirements to the equivalent of 15,000 shares of each stock a firm handles overnight, from 5,000 before the crash.

″He provides a number of really sophisticated functions and (the specialist system) works,″ said Eric K. Clemons, an associate professor at the University of Pennsylvania’s Wharton School.

″Stopping a market correction is not one of them,″ he said. ″If the market is overvalued, there is no power on earth that can stop that.″

End advance for Sunday Jan. 28

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