| BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
Stock Exchanges: Open All Night Trades anytime, anywhere--the whole world is going on Internet Time Want to see just how profoundly the Internet revolution is reshaping industries? Head to Wall Street. Responding to competition from after-hours electronic networks, the leading U.S. exchanges are getting ready to extend trading hours, setting the stage for round-the-the clock, global trading. On June 1, mighty Merrill Lynch & Co.(MER) acknowledged what upstarts such as E*Trade Group Inc.(EGRP) have proved: Investors can trade on the Net quite efficiently, without help from a middleman seeking a fat commission. Merrill unveiled plans for its own online system (page 45), but it hopes to stop the electronic tide there: It's betting it can keep its 14,800 brokers employed as fee-earning advisers. Such tactics, however, may be futile, warns Harvard Business School professor Clayton M. Christensen, whose 1997 best-seller, The Innovator's Dilemma, is becoming a handbook for CEOs remaking their businesses for the Net (page 46). The New York Stock Exchange and NASDAQ are making plans to extend their trading hours, in NASDAQ's case, to 9 or 10 p.m. Eastern Standard Time every weeknight. It's a move that many on Wall Street have expected--and many dreaded. Here is what it's all about. Why the rush to lengthen the trading day? In a word, competition. The U.S. exchanges--particularly NASDAQ--have been feeling the heat from private trading systems known as Electronic Communications Networks. The ECNs--computerized systems that match buy and sell orders from investors--have stolen more than a fifth of all trading in NASDAQ-listed stocks, in part by offering after-hours trading to institutions. Instinet says that 20 million of the 170 million shares it trades daily on its ECN are after hours. Indeed, the last straw for the NYSE and NASDAQ may have been recent moves by the Electronic Communications Networks to create evening Internet-based services for small investors in addition to their offerings for institutions. Meanwhile, on the Continent, Sweden is expanding to a 12-hour session, and the pending merger between the London and Frankfurt exchanges will likely create more headaches for Wall Street. ''Eventually we will have one 24-hour trading day'' in Europe, predicts Martin Coughlan, head of European and U.K. trading for Salomon Smith Barney(C) in London. Experts believe the Japanese exchanges, which currently close for business at 3 p.m., will now feel pressure to extend their hours, too. ''We will see real 24-hour seamless electronic-based trading, and it will affect all of the world's financial centers,'' predicts Stephen K. Green, chairman of HSBC Investment Banking PLC. For now, the big U.S. exchanges are proceeding cautiously: NASDAQ will likely start by offering evening trading in only its 100 largest stocks between 5:30 and 9 p.m., for example. How will extended hours affect trading? NASDAQ won't require all of its market makers to participate in late trading. The NYSE, by contrast, is leaning toward adopting the same practices as during its day session, which would require all specialists to handle all trades. The night sessions could create some interesting arbitrage plays for options traders if volatility increases after the sun goes down. But for small investors simply searching for a decent price for their 200 shares of IBM Corp., this volatility could do damage. ''Across the board, it'll be a chaotic, less orderly market,'' predicts one critic, Baruch College economist Robert Schwartz. Wall Street pros also note that after-hours traders often read breaking news the wrong way. For instance, when USA Networks Inc.(USAI) chief Barry Diller disclosed his bid for Lycos(LCOS), shares in the Internet-portal company jumped $10 after-hours on Instinet as investors cheered the prospect of a buyout. But Lycos Inc. declined more than $40 per share the next day on NASDAQ, as investors concluded Diller's proposed stock swap would entail too much dilution for Lycos shareholders. Is there a greater risk of manipulation? Possibly. Some experts believe that the lack of liquidity could lead to market manipulation by traders--particularly those acting in concert in Internet-based chat rooms. ''There will need to be vigorous surveillance of these markets,'' admits Robert L. Colby, deputy director of market regulation at the Securities & Exchange Commission. ''If there's not enough liquidity, you could see strange price patterns.'' Will late trading affect how companies disclose earnings and other news? Most likely. Now, companies wait until after the 4 p.m. market close to release news--particularly bad news. Firms are figuring that this reduces the risk of a sell-off, since it gives management some breathing space to put their best possible spin on the news. NASDAQ will give companies a 90-minute window before launching the night session at 5:30, but companies may be loath to do so if evening trading proves volatile. ''We're anticipating more companies will start releasing news in the early morning,'' comments Louis M. Thompson Jr., president of the National Investor Relations Institute. How will this affect companies that need to know closing stock prices? Most mutual funds say they will continue to treat 4 p.m. as the official market close, although a Fidelity Investments spokesman says that his firm could change its stance if late trading becomes a hit. Randy Picht, business editor at the Associated Press--which distributes data for stock tables to roughly 900 newspapers--says he expects West Coast papers with later deadlines to begin requesting 10 p.m. closing prices. And Picht says that one newspaper in the Eastern Standard Time zone, the Detroit News, is already leaning toward using the 10 p.m. prices in its final edition. How will trades be settled? Like banks that credit deposits made after 2 p.m. on the next business day, brokers are expected to record trades after 4 p.m. the following day as well. So trades made at night will actually settle four days later, rather than the current three-day deadline. Some market makers, including Bernard L. Madoff, principal of Bernard L. Madoff Investment Securities, believe that the added burden of processing evening trades will set back the current regulatory push for next-day settlement. Nighttime trading may create some unexpected twists: If one of your stocks starts to plunge around 10 p.m. due to volatile trading, you could wake up to an early morning margin call from your broker. What are the ripple effects? Extended trading will mean longer hours for some stockbrokers and financial journalists, as well as the back-office workers who clear stock trades. Evening trading could also force a shakeout among smaller brokers and market makers who don't have the resources to staff up. ''This looks like a panic move'' by the exchanges, fumes John W. Bachmann, managing partner of Edward D. Jones & Co. ''I don't understand it.'' If the truth be told, the shift toward extended trading isn't flavor of the month on Wall Street. ''This is being driven by the retail investor in the U.S.--not the institutions,'' comments Paul D. Roy, head of global equities at Merrill Lynch & Co. ''They don't want to keep their offices open 24 hours a day due to the cost.'' But from negotiated commissions to Internet-based trading, every new twist on Wall Street has generated fear, dislocation--and a more efficient market. Viva la revolucion. By Dean Foust, with Kerry Capell in London, Mike McNamee in Washington and Andrew Osterland in Chicago To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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