“The New York Stock Exchange is considering a plan to allow investors to execute more stock orders automatically — a major expansion of its push to expedite trading that would probably reduce the role of the floor brokers,” writes Kate Kelly in today’s Wall Street Journal.

“Big institutional investors favor the plan, because they consider the New York Stock Exchange sometimes to be slow and inefficient, with its system that historically has depended on brokers screaming out prices to “specialists” who act as auctioneers. Floor brokers oppose the plan because it could hurt their business and, they argue, cause price swings that hurt investors and companies alike.”

“The plan being considered by the Big Board’s chief executive, John Thain, would follow a more-modest proposal announced early this year that is awaiting approval from the Securities and Exchange Commission. The earlier plan allows investors’ buy and sell orders of any size to be electronically matched, so long as, at that moment, the prices at which stock can be bought or sold are the most attractive in the market. Current rules permit such automatic executions only of small stock orders, leaving the big ones to the specialists.”

“The drive to expand automatic execution at the NYSE has been motivated, in part, by a desire to address concerns raised by an SEC review of the nation’s stock markets. Some critics of the NYSE want to change trading rules to ensure quicker execution, sometimes at the expense of getting the best price. The NYSE hopes improvements in automatic execution will stave off regulatory changes that could hurt its market dominance. But to be sure, the Big Board still has by far the biggest share in the trading of its own listed stocks — 83% so far this year.”

“The latest proposal would allow buyers and sellers to opt for automatic execution not only at the so-called best price, but also at either up to five cents or several price quotes above or below that best price. Institutional investors have been clamoring for that ability, known as ‘sweeping,’ for months.”

“The schism throws a spotlight on the challenge Mr. Thain faces as he attempts to modernize the 212-year-old exchange, which under his stewardship looks less and less like its old self. The former Goldman Sachs Group Inc. president arrived in January on the heels of a scandal over executive pay and complaints from institutional investors that considered specialists untrustworthy in light of allegations that they were trading for their own accounts at other investors’ expense.”

“Since then, he has met with the Big Board’s most vocal opponents to hear concerns about the NYSE’s human-based trading model. The Big Board’s main competitors, the Nasdaq Stock Market and handful of Internet-based exchanges, handle all trades electronically.”

“Mr. Thain is struggling to find a middle ground by marrying technology with experienced human floor members to create the best trading environment for investors. ‘My goal is to create a hybrid marketplace,’ he said in a late-April speech. The idea, he added, is to rely on electronic executions for more-routine trades, while using specialists and brokers ‘to manage imbalances in supply and demand.’ To mollify brokers, Mr. Thain is considering ways to give them an active role in electronic trades by trying to improve prices that would otherwise be set automatically.”

“NYSE officials are working out the kinks in Mr. Thain’s first attempt at increasing automation, announced in February. They see that plan as a necessary first step to implementing anything broader.”