NYSE Launches OpenBook In Quest for Improved Price Transparency

Seeking to satisfy its customers' demands for enhanced price transparency, the New York Stock Exchange has launched a new market data product that will for the first time enable off-floor exchange participants to see the full depth of bids and offers in the Big Board's limit order book. Dubbed OpenBook, the product -- which will primarily be distributed through large market data vendors such as Bridge, Bloomberg, Reuters and Thomson Financial's ILX -- will initially be targeted at professional buy-side and sell-side traders.

Ron Jordan, vice president in charge of market data at the NYSE, says that OpenBook was designed to provide professional traders with an effective tool for gauging market depth in the decimal environment. Since the U.S. stock markets switched their price increment from fractions to decimals, he notes, price transparency has decreased, making it more difficult for traders to analyze the direction that markets are moving in. "I think that the top three reasons we are launching OpenBook are transparency, transparency and transparency," he says. "Since the decimalization of the market ... we've had a lot of demand from the professional trading community to see beyond the best bid .... And what this product allows them to do is to see what is behind the best bid and offer."

OpenBook, which will cover all the NYSE-traded stocks, will update all of its limit order book data every 10 seconds, between the hours of 7:30 a.m. and 4:30 p.m. each trading day. That depth of information is especially important today, because inthe decimal world the liquidity for stocks is spread out over 100 price points. In contrast, under fractions, active traders only had to worry about the liquidity -- or the size bid for or offered -- being spread out over only 16 price points for any given stock.

Jordan says that OpenBook will give the NYSE's customers a much better idea of how much interest there is in a stock at any given time. The exchange, he says, intends to make OpenBook widely distributed through agreements it has struck with major market data vendors.

Essentially, Jordan says, the NYSE is "wholesaling" its limit order book data to the like of Bridge and Reuters. After they receive that raw data from the exchange, the vendors can then redistribute that information to their customers in any format they want. However, Jordan emphasizes, the vendors cannot commingle OpenBook with limit order book data they display from any other markets. "Vendors are picking up (our) data, and then they are going to incorporate it into their displays for their users as they see fit. The only thing that we are requiring is that when they display the data it's labeled as NYSE Open Book," he says. "They can commingle it with other data, but not with other limit order books."

Sang Lee, an analyst covering e-trading at the research and consulting firm Celent Communications, applauds the NYSE for trying to improve its price transparency. However, he also says that the Big Board is doing an injustice to stock market participants by not allowing vendors to commingle OpenBook with the order books of other regional stock exchanges and electronic communications networks. Market data vendors, he says, should be allowed to offer their customers a "consolidated view" of all bids and offers for a given NYSE stock.

Those bids and offers, Lee points out, should include quotes being published by other regional markets and electronic communications networks. But by prohibiting vendors from offering a consolidated quote display that combines OpenBook data with bids and offers for NYSE stocks coming from other markets, he says, the NYSE is preventing end-users of its new market data product from getting an all-inclusive view of the market for a stock. "The whole purpose of market data feeds is to provide the ultimate end users with easy access to market information. But if that entails going to four different windows to get a better sense of where the market is, then that's ridiculous," says Lee.

That said, both Lee and Jordan agree that OpenBook should have significant appeal to professional buy-side and sell-side traders. "I think because of decimalization, it's really hard to gauge what the actual depth is in the market," says Lee. "So anytime you try to provide more transparency within the market, it's a good thing."