Brokerages resist NYSE call for electronic order capture

A proposed rule change by the New York Stock Exchange (NYSE) requiring the electronic capture of all stock orders before they leave the trading desk has Wall Street concerned that it will cost millions of dollars to implement and place too great an onus on the IT departments of brokerages that still record large stock orders on paper.

Specifically, the NYSE has proposed amendments to Rules 123 and 132 that would require brokerages to electronically capture trade orders at the point of receipt prior to delivering a physical order ticket to a "post." In light of the recent stock-rating scandal involving Merrill Lynch & Co. that is expected to spread to other brokerages, electronic trade recording would further expand the NYSE's oversight capability.

"This initiative of the electronic capture of orders before they're presented in the marketplace is an effort to avoid a situation where a person could falsify an order ticket," said a NYSE spokesman.

The NYSE rules change proposes that 17 data fields be filled out by traders, including information such as a firm's exchange symbol, clearing member organizations, the number of shares involved in a trade and the tracking or control numbers used.

"Most firms don't have a system for systemically capturing information about the order at [the trading desk]," said Scott Kursman, vice president and associate general counsel for the Securities Industry Association (SIA) in New York.

Kursman argues that a paper order ticket can be updated with "a flick of a pen," while it is much more difficult to go into a software application and change 17 data fields.

The Big Board has developed a program called Front End Systemic Capture (FESC) that expands upon its electronic network for the systemic capture of all orders prior to execution.

Costly Links

SIA officials wrote an April 26 letter to the Securities and Exchange Commission (SEC) -- which would have to approve the NYSE rule change -- opposing the amendment, arguing that it would hurt the broker/client relationship and that it would be costly for firms to systemically link information that resides in multiple locations in both electronic and paper formats.

Kursman said the brokerages most affected by the rule are those that specialize in block orders -- orders of 10,000 shares or more -- which are still recorded on physical tickets. Between 1 percent and 4 percent of orders from large broker/dealer firms are written on paper at the trading desk on the floors of exchanges. Firms such as Cantor Fitzgerald LP and Goldman, Sachs & Co. specialize in large institutional orders that are taken manually, Kursman said.

The NYSE rule change requires backing into the firm's data-collection process to retrieve information about an order from an earlier point in the life of that order. "It's a question of how far the firm can look back for that information and whether all of it is available for electronic capture for the purpose of creating a single record," Kursman said.

For institutional firms that handle large block orders, the change would require them to set up electronic order entry points for traders. Those computers would have to link with the firm's institutional record-keeping databases and with the NYSE's FESC system. Kursman estimated that it would cost institutional traders like Cantor Fitzgerald and Goldman, Sachs US$2 million to $10 million to set up the order trail system, including additional hardware and storage capacity.

Another problem with the proposed rules change is that it's alarmingly similar to computer system changes brokerages had to make to comply with the Order Audit Trail System. That project was approved by the SEC in June 1998 on behalf of the Washington-based National Association of Securities Dealers Inc. (NASD), the Nasdaq Stock Market's parent.

"Brokers didn't want to have to go through a whole other programming effort to create a similar process for the NYSE side, which had a different standard associated with it," said analyst Larry Tabb at TowerGroup in Needham, Mass.

An NYSE spokesman said the exchange "made every effort to have our proposal match up with procedures already approved by the SEC with respect to the NASD order trail system . . . but with differences between the markets, they couldn't be identical."

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