In a move that will leave the Big Board with just five remaining "Designated Market Makers," J.P. Morgan Chase & Co. has agreed to sell the business of Bear Wagner Specialists LLC to Barclays Capital, people familiar with the matter said.
With the agreement, the number of trading firms previously known as specialists on the New York Stock Exchange has shrunk once again. The role of specialists has been cut by more than half over the past decade as electronic trading proliferated, with specialist firms losing the monopoly they once had over specific stocks.
The banks aren't planning to disclose the terms of the deal, but people familiar with the matter say BarCap will pay roughly $30 million for Bear Wagner's business and portfolio. An announcement is expected Monday afternoon.
The price tag for Bear Wagner shows how far the industry has fallen in recent years. Bear Stearns paid $625 million for specialist firm Wagner Stott Mercator LLC in April 2001. A few years later, Bear had to book a $225 million charge to reflect the reduced value of the business when it raised its majority stake in the firm to 100%. J.P. Morgan inherited the unit last spring when the banking giant rescued investment bank Bear Stearns.
J.P. Morgan had been shopping Bear Wagner to potential buyers for several weeks after deeming it to be a non-core business. The sale is expected to close in the second quarter.
Specialist firms operate on the trading floors of exchanges, using their own capital to facilitate trades, often by taking the other side of buy and sell orders from brokers. For the NYSE, the move means an industry that less than a decade ago had 35 different firms will now have just five - Barclays, Bank of America Corp., LaBranche & Co., Kellogg Group, and Goldman Sachs Group unit Spear Leeds & Kellogg.
Barclays Capital, the U.S. investment banking arm of U.K. bank Barclays PLC, plans to merge the operations of Bear Wagner with its own NYSE market-making business, which it obtained last September when it acquired the broker-dealer operations of failed Lehman Brothers Holdings Inc. The combined operation will be responsible for "making markets" in over 800 NYSE stocks.
Many on Wall Street said the NYSE's move in 2007 to a hybrid model of electronic and floor-based trading would be the death knell for specialist firms. Floor trading now accounts for only about one-fourth of overall NYSE trading volume.
Still, amid hyper-volatile conditions, the ability of market makers to ensure liquidity has helped boost back some of their share of volume. In December, specialists participated in 7% of trades of NYSE stocks, up from 3.2% in August. The business, though risky, also does remain profitable, something that has been increasingly hard to find among financial firms.
The specialists have benefited from financial incentives introduced by the exchange that encourage higher participation from market makers. In addition, the NYSE has updated specialists' technology to ensure they are involved more heavily in both the open outcry and electronic markets and discarded rules such as forcing floor traders to stand next to the market makers to make a trade.
Slightly more than a year ago, specialists firms weren't being acquired at all. Susquehanna International Group LLP of New York and Van der Moolen Holdings N.V. of the Netherlands both closed shop completely in the last year.