Bear Stearns to Take Write-Off on Specialist Unit (Bloomberg)

By Yalman Onaran

May 14 (Bloomberg) -- Bear Stearns Cos. slashed the value of its New York Stock Exchange specialist unit and will take a $225 million charge as the shift to automated trading eliminates the need for brokers on the floor of the Big Board.

Bear Stearns also bought out Hunter Partners LLC, its minority partner in the Bear Wagner unit, to ``give us more flexibility in managing the business in this changing environment,'' Chief Executive Officer James Cayne said in a statement today. Terms of the transaction weren't disclosed.

The NYSE's new automated trading system has eliminated work for floor traders who now handle about 18 percent of the 1.6 billion shares traded daily on the Big Board, down from 86 percent at the start of 2006, according to the exchange's Web site. Shares of LaBranche & Co., the biggest specialist firm, have declined 38 percent in the last year as increased electronic trading reduced demand for its services.

``The earnings capacity of specialist firms has been hurt dramatically,'' Bear Stearns Chief Financial Officer Sam Molinaro said today at an investor conference in New York. ``Given the current environment, we concluded that we had no choice but to write-off'' a portion of Bear Stearns's investment in the specialist firm.

The non-cash charge will reduce earnings in the company's fiscal second quarter, which ends May 31, Bear Stearns said. The firm and Hunter Partners bought Wagner Stott Mercator LLC for $625 million in 2001 and eventually renamed it Bear Wagner. Hunter Partners initially held a majority stake of 50.2 percent.

Bear's Profit

In the first quarter, profit at Bear Stearns, the fifth- biggest U.S. securities firm, rose 8 percent to $554 million as higher revenue from trading derivatives and debt of troubled companies overcame a slowing market for home loans.

Shares of Bear Stearns fell $2.55, or 1.6 percent, to $153.85 at 4:14 p.m. in New York Stock Exchange composite trading. The stock has risen 14 percent over the last year, in line with the 12-member Amex Securities Broker/Dealer Index.

Bear Wagner represents more than 350 publicly traded equities with a total market capitalization of more than $2.8 trillion, according to the statement. Bear Wagner will be included in Bear Stearns's Global Equities Division.

NYSE Euronext, which operates the NYSE, introduced its automated Hybrid Market early this year to meet investor demand for split-second electronic transactions, while keeping traditional haggling that floor brokers say reduces volatility in stock prices.

Job Cuts

Bear Wagner is one of seven specialist firms at the NYSE, helping to keep orderly markets by buying or selling stocks when they can't match orders from other traders. Their pivotal role as market makers at the NYSE drove Goldman Sachs Group Inc. to buy Spear Leeds & Kellogg LP for more than $7 billion 2000.

Specialist firms including LaBranche, Van der Moolen Holding NV and Bank of America Corp. have fired a total of about 200 employees in the past year. Brokerages including JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Credit Suisse Group, UBS AG, and Sanford C. Bernstein & Co. have also eliminated trading staff as they rely more on computers.

``Bear Wagner has been supportive of the exchange's implementation of its hybrid system but it is becoming painfully clear that the specialist system, and the value that it brings to the investing public with regard to trading transparency, committing capital and providing liquidity, is rapidly approaching the point where it is no longer a viable business model,'' Bear Wagner CEO Peter Murphy said in the statement.

Earlier this month, NYSE Euronext Chief Executive Officer John Thain said that traders handle enough shares to merit the floor's current size. This year the NYSE shuttered one of five trading rooms, shrinking that space for the first time in more than a century.

``The exchange already is almost all electronic, but a lot of the electronic trading is the specialists and the brokers on the floor,'' Thain said during a conference at Baruch College in New York. ``They will continue to add value, which means there will continue to be a floor.''