NYSE: ITS to be scrapped
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April 6, 2000: 5:05 p.m. ET
But plans for a new trading system still lack details; 'CLOB' proposal snubbed
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NEW YORK (CNNfn) - The New York Stock Exchange, the 207-year old granddaddy of securities markets, on Wednesday said it would scrap its aging Intermarket Trading System (ITS), and replace it with a modern system.
The ITS, developed in the mid-1970s -- enables traders at the nation's various exchanges to communicate with each other and, subsequently, trade stocks regardless of where the orders were placed, whether on the NYSE -- the world's biggest and most liquid exchange -- or the Pacific Stock Exchange in San Francisco, for instance.
The new system would give NYSE members better trading choices to offer customers, and provide more direct and efficient access to markets.
"A new NYSE -- we term it "Network NYSE" -- is an exciting new foundation for the future of this institution," NYSE Chairman Richard Grasso said in a press briefing in New York.
At that press conference, NYSE director and advisory committee Co-Chairman Alex Trotman said the Big Board will quickly press ahead with its electronic initiatives, but is not sure what the new system will look like.
"We don't know yet (how it will look)," Trotman said. "We are recommending that we work with the industry in total to develop a replacement. What that would look like and how it will work, it far too early to say."
The NYSE also rejected a proposal to create a central limit-order book, or CLOB, despite the fact that some of the Big Board's biggest and richest members, including Goldman Sachs Group and Merrill Lynch & Co., backed the plan.
A CLOB is a single computerized system in which traders and investors could see pending buy and sell orders for U.S. stocks. Limit orders are orders to buy or sell at a specific price.
The NYSE's board, in throwing out the CLOB proposal, was following the recommendation of an advisory committee as part of its decision Thursday to unanimously adopt the committee's report on market structure.
Forced to modify by technological changes
The Big Board is being forced to reinvent itself due to the technological revolution taking place in the business of trading stocks. Although the NYSE is partly automated, people still play a key role in the trading on its vast downtown Manhattan trading floor at Broad and Wall Streets.
But alternative or off-exchange electronic trading networks known as electronic communications networks, or ECNs, are fast becoming an effective way to trade stocks listed in other established markets. ECNs, sometimes nothing more than an office full of computers, automatically match share orders placed by brokers, often bypassing an exchange and its traders. That enables the fledgling ECNs to carry out trades more quickly and cheaply.
In the last few years, ECNs have grown to account for more than a third of the daily trading volume in Nasdaq stocks. But because ECNs do not enjoy official exchange status, they are excluded from the NYSE's national market system and its link, the Intermarket Trading System (ITS).
Through the ITS, traders at the NYSE and its chief rival, the Nasdaq, as well as at the American Stock Exchange and the regional U.S. exchanges, buy and sell stocks, regardless of where the orders originate.
The ITS, born out of 1970s federal legislation designed to erect a national market system between the exchanges, has come under fire as being an antiquated system that excludes alternative or off-exchange stock trading networks.
Grasso said the new initiative is being undertaken to address those concerns.
"What we are really trying to get to, is some way of technologically ensuring that the customer gets the best price, wherever that may exist," he said. "So equipping brokers-dealers with access to markets at the best price is the objective of this exercise."
New plan could upset member firms
The NYSE's plan is likely to upset the NYSE's big member firms, which are lobbying to build an even stronger linkage between the nation's exchanges in a bid to further automate stock trading. Even though the Nasdaq stock market is not officially an exchange, it also is linked to the ITS. But Nasdaq officials long have complained that the ITS link is weak, making it difficult for the Nasdaq to trade NYSE stocks easily.
Lee Korins, president of the Security Traders Association, when asked by Reuters about the NYSE's decision to get rid of ITS, said, "I agree with the NYSE that ITS is an archaic system and one that should have been replaced a number of years ago. If we have a better communication system within the markets, then the competition that exists will benefit investors because they will get access to various places."
But Korins stopped short of advocating a central limit-order book, or CLOB, pushed by the big Wall Street firms.
"We're not in favor of a monolithic system that would eliminate competition," Korins said. "Most of the creative changes that have come in the last 25 years have come from smaller entities that have put together something to compete with market centers. Take that out of the equation, I think that we will be the poorer for it down the road."
-- from staff and wire reports
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