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Power Exchange Politics: Weighing the Regulator's Role

Fortnightly Magazine - October 1 1999

the two exchanges, he prefers specialists and open-outcry trading over computer programs.

"I like to open up the paper and call and make a trade. As a general rule, I would not want to trade through an automated computer program because they are vulnerable to gaming," he says. "I feel safer with a specialist at the New York Stock Exchange, rather than with computer-based price resolution."

For example, McCullough says that exorbitant PX averages push prices higher. The PX price can be $41.81 one day and $67.12 the next. Traders are stumped over changes in the PX market because the change implies the price of gas has gone up to $45, he says. Then you find out that there are no constraints in supply and the PX computer program is $20 over market price, he says.

"Someone learned to game the market," he concludes.

According to McCullough, Cazalet will discover that he is applying to be a specialist. (A "specialist" is a member of an exchange who maintains a fair and orderly market in one or more securities.)

McCullough likens the situation to the NYSE, which assigns a human specialist for each stock to make a market in that stock. The whole system is based on his intelligence and honesty, he says.

"NYSE could have replaced these guys with computers. Ed will play the specialist side of it," McCullough says. "People will prefer that he set the price. [In fact], I would rather call Ed Cazalet than his computer."

In fairness, McCullough predicts that Cazalet would recognize that he was being gamed and eventually change the rules at APX. Nevertheless, at the end of the PX mandate, McCullough fully suspects California will go back to standard markets where players buy from the cheapest source.

- R.S.

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