By Larry Dignan  |  Posted 2005-03-07 Print this article Print

The exchange wants to automate its trading systems. But many clients prefer dealing with human specialists. How John Thain will try to reach both objectives.

Is Faster Better?

Ultimately, all of the NYSE's systems, most of which are homegrown, will be touched by the moves toward instant, higher-volume trading. The goals are clear: automate as much as possible; complete trades faster than today's 14-second average; maintain an 80% market share in trading NYSE stocks; fend off electronic rivals; and navigate a rapidly changing regulatory landscape.

"Over its 212-year history, the exchange has built its reputation on the highest standards of market quality," Thain said at an August press conference. "What we have not offered to a sufficient degree is speed." Indeed, Mogavero's trade took 8 minutes, but she notes that "speed wasn't the issue with this trade."

Why did it take minutes and not seconds? Today, specialists and floor traders may talk in several conversations in order to complete trades.

Mogavero found a buyer for her remaining 49,000 shares by chatting to a specialist who noted that a Merrill Lynch trader was interested in her shares.

"I wouldn't know those shares were out there on the Nasdaq," Mogavero says. "There's no one to ask. At an electronic exchange, I may see an offer of 1,000 shares and not know there's another 100,000 behind it to be sold. Here, I can ask around."

Now the NYSE has to speed up Mogavero's trade. According to Robert Britz, president and co-chief operating officer of the NYSE, "Right now, we're laying the foundation."

There are two major technical pieces to the foundation. The first is the eBroker handheld device. This is a custom-built computer from IBM that can take handwritten notes and wirelessly transmit details of orders to the NYSE's maze of interconnected systems on its trading floor, in its data centers and offices at 11 Wall St., and elsewhere. More often than not, traders input figures into eBroker more than they talk. Without eBroker, trading just wouldn't happen, Mogavero says.

The eBroker system will get an update called eQuote, due in late summer, Britz says. The system will serve as an upgrade to the eBroker terminals on the floor, allowing traders to use their handhelds to perform many of the tasks they now do verbally. For instance, traders will be able to pitch and book big block trades of, say, 50,000 shares at $50 each, to specialists through the eBroker handhelds. The upgrade will also allow traders to store disclosed and undisclosed offers, such as a disclosed offer of 50,000 shares at $50 and an undisclosed 10,000 just in case the stock runs to $50.30.

These reserve shares can be kept out of view of the specialists and shared among traders. Applied to Mogavero's Bank of New York trade, eQuote would allow her to find out electronically—and discreetly—that Merrill Lynch was interested in buying more shares. Taken to the extreme, you could have a crowd of people transacting trades wirelessly on the market floor without saying a word.

The second project will be to provide specialists with application program interfaces (APIs), software sockets that allow them to connect their book of orders to algorithms that will make trades for them and keep the markets moving smoothly.

These algorithms will be able to generate bids that improve the exchange's best offer price, withdraw a previous bid, supplement bids, execute trades and line up specialist interest in shares at different price points. Algorithms won't be able to take bids or make offers. Only specialists will be permitted to do that, in an effort to buffer volatile trading and check trades.

Simply put, much of the specialist's job today will be automated. Thomas Schafer III, who specializes in the trading of shares in pharmaceutical giant Pfizer, hopes automation will filter out the "noise" of the market. To Schafer, that means trades ranging from 1,000 to 5,000 shares. These are trades too big for Direct+ because of the NYSE's cap on electronic trading, but too small to make a meaningful difference to the pocketbook of a specialist, who profits from the difference between a bid and an ask in a market order or through trading the firm's account.

Schafer and his crew would rather negotiate big block trades, say, 500,000 shares. "I expect this to free me up from the mundane and focus more on the gamesmanship," he says.

Britz says that without these sockets, specialized software for specialists couldn't be created, closing them out of the electronic market. But no firm timetable for a rollout of the sockets or software for the specialists has been set.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.

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