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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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APRIL 26, 2005
How Tech Is Repaving Wall Street The inexorable move toward all-electronic trading will pit the NYSE and Nasdaq in a battle for supremacy -- or will some upstart steal the prize? The stock market has seen plenty of technological improvements ever since 24 merchants gathered in lower Manhattan in 1792 and agreed to trade securities for a commission, establishing what would become the New York Stock Exchange. Imagine what it must have been like when the telegraph was invented in 1844 and investors outside New York City could easily participate in the market. Or when the stock ticker was invented in 1867, allowing investors to see current share prices. Fast-forward nearly 150 years to the third week of April, 2005: Stock trading took another giant leap forward with the NYSE announcing a surprise merger with 8-year-old computerized trading platform Archipelago (AX ). Just two days later, the rival Nasdaq stock market (NDAQ ) announced plans to acquire another independent electronic exchange, Instinet (INGP ). For individual investors, the new and increasingly cutthroat competition between the two major exchanges -- as well as with newer electronic trading platforms and foreign exchanges -- is likely to be a positive as trading becomes cheaper, easier, fairer, and less subject to manipulation. But traders warn that these changes, as well as recent efforts to regulate the new, far more technologically advanced trading systems, will have many consequences for the $230 billion securities business, most of them unforeseen. "THE LAST BASTION." Given the complexity of markets, "You make one small change and then down the line as a third effect, something really bad happens," says Larry Leibowitz, who manages automated trading and broker services for UBS. And resistance to change can also play a role. Shortly after the NYSE's deal for Archipelago was announced, a group of Big Board insiders was said to be considering an offer to buy the exchange and stymie its effort to take over Archipelago. What's at stake is nothing less than who'll be the eBay (EBAY ) of stock trading. With the major exchanges' recently announced deals, stock trading is likely to soon go all-electronic. The NYSE has carefully nurtured its system of human floor brokers and trading specialists over the past three decades as computerized trading and electronic networks took hold, offering lower costs, far faster speeds and (most traders say) better execution quality. "The New York Stock Exchange was the last bastion of doing it the old-fashioned way," says Asiff Hirji, chief information officer of Ameritrade (AMTD ). He calls the change, "decades overdue." The NYSE still promises to maintain the historic specialist system as part of an as yet amorphous plan to create a hybrid market where some trades will be conducted electronically and some on its much-storied floor. But investors and analysts expect much of the volume to quickly migrate to improved and cheaper electronic channels once they become available. "The specialist system is a dying business," says Michael Panzner, head trader at Rabo Securities. AVAILABLE TO ALL. None of this, however, explains Nasdaq's deal with Instinet. After all, the Nasdaq was created as the first all-electronic stock market in 1971. The explanation: Technology is also fostering a more fundamental change in market structure that even Nasdaq must catch up with: Where a trade is executed has less and less to do with where a stock is listed. This is a bigger change than first meets the eye. In the old days -- namely, the first 200 years of stock trading -- an investor would initiate a trade by calling a broker. That broker would call a trader, who would work the order with a specialist on the floor of the NYSE or, later, electronically with a Nasdaq market maker. In the last eight years, however, alternative trading platforms like Instinet or Archipelago have flourished thanks mainly to new regulations that required all orders to be displayed electronically to traders and made available to investors. Now a professional trader can choose the best price and strategy available from a variety of electronic platforms offered by independents, major brokerages, or a variety of exchanges.
BW MALL
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