The elite market-makers that buy and sell stocks on the New York Stock Exchange saw their profitability fall sharply in 2003, the exchange said on Monday, underscoring the increasingly challenging business environment faced by the firms.
According to a release on the NYSE’s Web site, the exchange’s seven specialist firms posted a loss of $135 million in the fourth quarter of 2003, down from a profit of $106 million in the year prior.
The specialists’ revenues also fell by nearly half during the quarter, even as the NYSE’s other trading entities such as floor brokers and traders experienced a jump in their profits.
For the full year, the market-makers earned only $3 million after-taxes -- a steep decline from 2002’s profits of $397 million, the NYSE said.
The financial figures punctuate a turbulent year for the specialists. Last month, five of the largest firms settled allegations of improper trading with the NYSE and the Securities and Exchange Commission for a collective sum of $240 million.
The five firms involved with the settlement are FleetBoston Financial Corp., Bear Stearns Cos.’ Bear Wagner Specialists, Goldman Sachs Group Inc. Spear, Leeds & Kellogg; LaBranche & Co.; and Van Der Moolen Holding NV’s Van Der Moolen Specialists USA.
In February, the NYSE proposed rules that eliminated current trading restrictions, in a move to define itself as a fast market akin to its electronic competitors.
As a result, the exchange expects to process its less liquid shares electronically, while specialists will handle larger trades. The plan is still pending regulatory approval.
But that proposal is expected to erode further the market-makers’ overall ability to profit from trading activity. LaBranche, the NYSE’s largest share dealer, acknowledged as much in its annual report filed earlier this month.
“The NYSE’s recent proposed changes in its automated trade execution system and the SEC’s recent proposed structural changes in the U.S. equity trading markets may have an adverse effect on our business,” LaBranche said in its filing.
In the financial statement from the NYSE, the exchange said that its member firms saw after-tax profits of $3.11 billion in the fourth quarter and revenues of $36.22 billion, compared to $695 million in after-tax profits on revenues of $35.51 billion in fourth-quarter 2002.
In 2003, the firms reported after-tax profits of $10.89 billion on revenues of $144.51 billion, compared with $4.52 billion on revenues of $148.68 billion in 2002, the exchange said.