A New Worry For Wall Street
Liz Moyer, 03.05.07, 6:00 AM ET
Last week's market turbulence and technical glitches have overshadowed an important regulatory change that kicks in this week.
Beginning today, all trade orders are supposed to be routed to whatever exchange offers the best price, meaning markets like the NYSE Group's (nyse: NYX - news - people ) Big Board could lose share to smaller regional exchanges and electronic networks.
The impact won't be completely felt for another month, courtesy of a delaying action from the NYSE. Last week, the exchange received an extension from the Securities and Exchange Commission that gives it until April 5 before it has to comply with all of the new rules, which are called Regulation NMS.
The NYSE says it needs more time to connect its systems to those of potential rivals, including the International Securities Exchange and Knight Trading's Direct Edge. The exchange made a similar request in January to get the deadline moved from February to March.
On Friday a NYSE spokesman downplayed the request for the extension, saying the exchange was already compliant with Reg. NMS and could route orders to 10 other exchanges or networks. "There's no drama here," the spokesman said.
But the request to hold off the change comes after several high-tension days at NYSE and growing concerns among traders that the initiation of Reg NMS today will jam up communications among exchanges. Late Friday, the SEC said in a statement that "exceptional trading volume and price volatility of the equity market over the last few days raise the potential of even greater challenges" during NMS' phase-in. The agency said if problems arise, it will consult with the exchanges whether they are so serious that the NMS rules should be suspended.
Until now, the exchanges have routed orders through a system called Intermarket Trading System. ITS is three decades old, and observers are worried it won't be nimble enough to handle the potential increase in order traffic next week as exchanges and networks route more orders among themselves.
Most exchanges will begin moving away from ITS as the new rules go into place, but they'll do so gradually. Meanwhile last week's lurching market demonstrated the risk of placing too much technological strain on the system. Tuesday's market rout overwhelmed NYSE's own messaging system, forcing delays in handling orders. By the end of the day, floor brokers were processing orders manually. Many stayed after hours to confirm trades. Messaging traffic was even worse Wednesday, according to NYSE Chief Executive John Thain, who said it hit 20,000 messages a second at one point.
"One of the servers got overwhelmed," he said during a conference call arranged by Prudential Securities last week. "A certain number of orders that were sent to the exchange got caught in this queue and didn't necessarily get executed the way people thought."
Thain said the exchange had "rebalanced" its servers and would be adding capacity.
But Tuesday's trade delays, which spread to other networks and exchanges though less noticeably, have increased the anxiety as Reg. NMS kicks in.
The chief executive of one relatively new network, BATS Trading in Kansas City, said in an e-mail to a regular group of some 1400 readers that he was "concerned about the stability of the public markets in the transition to Reg. NMS."
David Cummings, the BATS chief executive, added, "I would urge all participants across the industry, especially those with high-speed automated trading models, to be mindful of any unnecessary loads their orders could place on the markets."
The messaging snafus were enough to pique the interest of the SEC, which has been talking to NYSE about what happened. Thain has denied news reports that a bigger investigation into this week's events is underway. |
