Wall Street Rush Hour

Every weekday morning around 8:45, the floor of the New York Stock Exchange Inc. comes to life. Traders dart from broker booths to trading specialists, scribbling quotes on tiny pieces of pink paper. The specialists themselves are hard at work too; using specially designed keyboards to scroll through pages of data. This pace crescendos until the bell kicks off trading at 9:30 a.m., when it becomes downright frenetic. Scampers become sprints. Typing becomes flailing. For a few moments, the 3,300 people who live and die on the floor of the world's largest exchange are moving as quickly as humans possibly can.

In the middle of all this madness, Bill Bautz stands calmly, arms crossed in front of him. With a wry smile, he glances at a screaming crowd to his left, nods his head slightly from side to side and laughs. For Bautz, the NYSE's senior vice president and CTO, this madness is just a microcosm. Action by brokers on the floor of the exchange represents only 10 percent of the 1 billion shares traded on the NYSE every day. The rest, Bautz says, is handled electronically by the expansive processing systems he helped build. By year's end, these systems, some of the fastest in the world, will be capable of transmitting as many as 2,000 messages per second. Bautz jokes that the technology makes the rat race around him seem lethargic, inefficient and, well, just plain human. (Bautz has since retired from the NYSE but continues to play a consultative role.) "You think this is fast?" he asks. "The NYSE is one of the only exchanges in the world that still has a trading floor. In many ways, what you see here is really a dinosaur."

Bautz is right; during the past 10 years, financial services organisations have employed so much technology that floors like the one at the NYSE have become veritable throwbacks to the days of yore. Everything in the industry, it seems, is wired, from brokers to markets to new trading forums such as electronic communication networks (ECNs). Today, just months after surviving a Y2K remediation that cost the industry an estimated SU$5 billion, financial services technologists are gearing up for new challenges they say could transform the business even more.

Sometime next year, the industry will switch from trading equities in fractions to trading them in decimals, necessitating major code improvements and a significant increase in system capacity. On the more distant horizon, there'll be a move from batch to real-time transaction processing, facilitating straight-through transactions by linking brokers directly to banks and exchanges. Finally, experts say that as more organisations offer customer-oriented Web applications and as more customers transmit financial information online, technologists must find new ways to handle issues of security and access--and new models to promote IT solutions to the business world at large.

"It took years, but we've built this industry on a foundation of technology," says John Panchery, vice president and managing director of systems and technology for the Securities Industry Association (SIA), an organization that serves more than 740 brokers and securities companies. "Now comes the hard part. We've got to take the technology we already have and make it work. That's no easy job, and it's going to take time and money. All of that responsibility will fall to the CIO."


Financial services technologists agree that perhaps the most immediate issue will be the impending industrywide move from fractions to decimals, known among technophiles as decimalisation. Since the NYSE opened its doors in the late 1700s, U.S. equities have been traded in fractions, a vestige of the Spanish system by which coins were cut into eight pieces and traded as "bits." For more than 200 years, equities and options were priced in increments of eighths of a dollar, and therefore had as many as eight price points on any given trade. In 1997, markets began trading in sixteenths, offering as many as 16 price points. Sixteenths--traders frequently refer to them as "teenies"--are the denominations in which most equities trade today.

Change, however, is right around the corner. For years, experts have decried fractions as an anachronism, saying that because most modern currency is exchanged in dollars and cents, securities should be traded in the same denominations. Finally, earlier this year, the Securities and Exchange Commission agreed and mandated that markets gradually lower their trading increments from sixteenths to nickels to pennies, and convert all resulting measurements to decimals. Under the new rules, equities would be traded as cash--instead of, say, IBM stock selling for 112 and 3/16, it would sell for 112.19. These changes will take effect April 1, 2001, and all equities companies must comply.

Between now and then, of course, the responsibility for converting to decimals lies with the exchanges themselves. Before brokers can trade on equities priced in decimals, the exchanges offering these equities must convert prices to decimals. According to Bautz, this process is fairly straightforward. Most computers read fractions as decimals to begin with, so the issue is simply reprogramming systems to display decimals instead of fractions. The project is already complete at the NYSE, Bautz says. At the Nasdaq, the effort is taking a bit more time. Executive Vice President and CIO Gregor Bailar says the switch should be finished by next spring.

Exchanges aren't the only ones that need to prepare for these new prices. Brokers will have to fix their systems too, and Scott Abbey, chairman of the SIA's decimalisation committee, says this may require some fairly significant changes in system code. Because many broker systems are programmed to accept data only in fractions, broker technologists might need to reprogram these systems to understand and accept prices in decimals. What's more, because any trade can theoretically have an infinite number of decimal points, programmers will need to establish limits so that their systems read just the first two or three decimal points of every price. In some cases, Abbey says, these changes will be simple. In other cases, he says, they could mean millions of tiny code modifications, a process not unlike the one necessary to prepare for Y2K.

"This might sound obvious, but the more information you've got, the more changes you need to make," says Abbey, who doubles as executive vice president and CIO at Paine Webber Group. "For smaller or newer organisations, this conversion isn't that big of a deal. But for some of the older ones, those that have traded millions of equities on fractions for years, the effort can be quite an undertaking."


What will this process cost? Overall, North American securities companies will spend approximately US $900 million on the conversion between October 1999 and its completion date, expected mid-2001, according to a report published by Needham, Mass.-based TowerGroup. At Paine Webber, Abbey estimates it will probably cost a couple of million dollars, adding that so far the remediation effort has changed hundreds of thousands of lines of code. Generally, Abbey isn't too worried about this process--when asked to describe it, he says it doesn't require "rocket science." He does, however, admit that the issue of reformatting report screens to display prices in decimals could present a bit of a challenge, so in preparation, his programmers began designing new report screens in February. They are now nearly done with the job of creating them and making the other code changes needed to support decimal trading.

At Fidelity Investment Systems Co., a subsidiary of Fidelity Investments, CIO and President Don Haile is more concerned about whether his systems will be able to handle the trading volume that decimalisation is expected to bring about. More price points mean more prices at which brokers can trade, which in turn means a major uptake in trading volume. Industry technologists say the 1997 switch from eighths to sixteenths resulted in a 14 percent increase in overall volume, and a 1999 report by Palo Alto, Calif.-based consultancy SRI International suggests a switch from sixteenths to pennies could catapult daily volume another 139 percent. Haile says his estimates support this claim. Currently, Fidelity's systems have a capacity of several thousand messages per second, and the brokerage is anticipating it will need to support between six and seven times that number.

To prepare for this increased volume--and to keep up with current demands--Haile says Fidelity adds new Sun Microsystems and Stratus Computer CPUs to its mainframes almost monthly. At Charles Schwab Co., Adam Richards, vice president of architecture and planning, does the same, buttressing his network with CPUs and servers as needed. Fidelity's goal is to maintain network capacity at between three and four times peak usage, which Richards says is "a moving target from day to day." (So far the broker's high-water mark for simultaneous secure log-ons is about 95,000.) Perhaps the most innovative approach to increasing capacity has been at E-Trade Group, one of the industry's new Web-based brokers. There, CTO Josh Levine has installed a load-balancing application from Sunnyvale, Calif.-based Resonate to distribute traffic and dispatch customers to one of several data centers in the United States. As volume increases, the device diverts traffic evenly to one center or another, managing capacity as it goes.


Although these decimalisation efforts take up a lot of their energy, technologists such as Levine and Richards have glimpsed an even bigger challenge lurking on the horizon: In order to stay competitive and keep pace with the increasingly Internet-driven market, the industry is making a move from batch to real-time transaction processing. Although the switch probably won't occur until 2002 or 2003, technologists at markets and brokerage houses are already planning ahead, merging processes and doing what they can to minimize current batch windows. Unlike decimalisation, this process requires a total restructuring of the systems that drive the industry, and experts predict it could cost as much as, if not more than, what it cost to prepare for Y2K. According to the SIA's Panchery, this is reason enough for technologists to start panicking.

"The year 2000 problem was a maintenance job; this is a rewrite," he says. "Companies need to analyze what processes still occur after the close, what processes don't [occur then] and what processes can happen in real-time. That exercise will take time, and that time will cost billions."

Today, though most financial transactions are effective as soon as traders submit them, it actually takes much longer for money to change hands. Once trades have been completed on a market or ECN, local processing systems send them to the Depository Trust Clearing Corp. (DTCC), the company that oversees clearance, settlement and custody of almost every U.S. equity trade. At the DTCC, proprietary Assembler-based software filters transactions by equity. Next, an order fulfillment system debits the buyer and credits the seller, then automatically sends confirmations to both parties. Finally, when the process is over, the system filters the completed batch by broker and sends trades back to the companies from which they came. This process can take as long as two days.

Broker batches begin where the DTCC's leave off. These companies process transactions only after they've received confirmations from the DTCC. Then, with the help of mostly homegrown systems, they update accounting systems, balance the general ledger and, of course, reconcile customer accounts. The companies generate confirmations of their own and either send or e-mail the documents to customers at the end of the cycle. This part of the process can take as long as one day.

Sounds complicated, right? It is--which is why some financial services organisations are doing whatever they can to speed the process. The DTCC, for example, is looking into replacing its netting software with an Internet-based application that queries large exchanges for trades, then processes them right away.

Don Donahue, managing director for customer marketing and development at the DTCC, says he's also preparing his systems to support all standard message formats, including XML, Financial Information Exchange (FIX) and the International Organisation for Standardisation's 15022. By acquiring these new technologies and by advocating new standards in messaging and in message transfer, Donahue says the organisation will be able to accept credit and debit information more easily, facilitating the settlement and confirmation steps as well.

"It's essential that people migrate to newer technologies and messaging capabilities, and standardise on newer file transfer capabilities," he says. "It's the only way real-time processing will ever survive."

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