Equity traders are muttering a silent prayer, crossing their fingers and counting down the days until Jan. 1, 2000. As the new century dawns, many computer systems set to read years by the last two digits will lose their ability to track dates.
While the so-called millennium bug will challenge virtually all businesses, government agencies and other organizations, equity traders will be particularly vulnerable because of their heavy reliance on computer technology.
Street-wide Testing
In a letter to broker dealers and transfer agents last November, Securities and Exchange Commission Chairman Arthur Levitt requested that their systems be Year-2000 compliant by the end of 1998, to enable them to participate in a Street-wide testing scheduled to begin in February 1999.
But few industry observers expect that goal to be reached.
"I'd say that the chances of total compliance by the end of this year are about nil," said a trading director at a major Midwest equity-trading firm.
"Who knows what's going to happen, but I've heard things like systems kicking out 100 years of dividends," the trader said. "Other things, like holding periods for taxable items and past-due accounts getting all messed up, have been mentioned."
Even something as basic as computer-generated time-stamping is at risk. "Time stamping a ticket with 1900 just won't work," the trader quipped.
The Stakes
The stakes facing the trading industry are enormous. A report on the Year-2000 problem, released earlier this year by consulting giant Computer Sciences Corp. of El Segundo, Calif., predicted that a one-week failure at a major U.S. clearinghouse could result in total market costs of up to $5.2 billion. "Trades may be transmitted with incorrect or missing information, or may not be transmitted at all, due to non-compliant computer systems," said Craig Plotkin, a Computer Sciences senior consultant.
"If one firm injects bad trades into the system, its trading partners would have to manually investigate each one, which would slow things considerably," he added.
"Traders are likely to experience real operational problems," said Tony Keyes, the author of "The Year 2000 Computer Crisis: An Investor's Survival Guide," published by The Y2K Investor of Brookeville, Md. Keyes noted that with a typical trade involving more than two dozen organizations from order entry to clearance and settlement, the potential for a Year-2000 glitch creeping in along the trade chain is substantial.
"I think it's more likely to happen than not," he said. "The question is, Will the trading firm discover the weak point before Jan. 1, 2000?'"
"What makes the problem particularly worrisome is that nobody works in a vacuum," said Bernard L. Madoff, chairman of New York-based third-market trading firm Bernard L. Madoff Investment Services.
"Everyone is co-dependent traders, brokerage firms, clearing organizations, banks and so on," he added. "Solving Year-2000 issues is a major undertaking and a big concern because it's something that was never done before."
Time Consuming
John Panchery, vice president and Year-2000 manager for the Securities Industry Association, said the task of checking in-house systems and external information sources for Year-2000 compliance is more time consuming and complex than anyone anticipated a few years ago.
"Someone at each organization needs to be doing due diligence to make sure that all of the products traders use have been checked for compliance," he said.
But Panchery admitted that much work remains to be done over the next year-and-a-half.
The trading desktop is an area that's particularly susceptible to Year-2000 problems, said Lawrence Tabb, group director of The Tower Group, a Newton, Mass. firm that analyzes technology trends in the banking and securities industries.
"The trader is directly responsible for the P&L [profit and loss statement] of the firm," he said. "If his trades don't clear or settle properly because of Year-2000 problems, the firm will lose money."
Market-data support may be the thorniest problem, according to Tabb. "There's a tremendous amount of information, from an almost endless number of sources, that comes to traders through electronic means," he said.
"If the analytics behind the data aren't set up to be Year-2000 compliant," Tabb explained, "then traders aren't going to receive the kind of accurate market-data support they're used to receiving. The problem is insidious and potentially disastrous."
Tabb added that it is difficult to avoid the threat because of the number of information sources involved. "How can you question everyone who generates information? You can't," he said.
Order-Routing Systems
Panchery observed that order-routing systems are especially susceptible to Year-2000 problems. "These systems are heavily reliant on dates and comparisons of dates. A failure here, or at any other point from the trader's desktop down to the floors of the exchanges and back, could lead to big trouble," Panchery said.
Panchery added that management systems represent another area that requires close attention. "Since these systems rely on market fluctuations by date, a Year-2000 bug could produce catastrophic results," he warned.
Telecommunications systems, which traders use for everything from executing trades to calling out for pizza, are also imperiled by the Year-2000 problem. According to Ken Dumont, a vice president at Mitel, a telecommunications equipment manufacturer based in Kanata, Ontario, problems will occur where telephones, private switchboards, modems and other telecommunications products interface with databases.
"If a firm has a link between a database and its telecommunications system for call logging, tracking or management, there's a potential for problems," he said.
Dumont noted that difficulties can also arise on the telecommunication carrier's end, as billing and other systems go haywire, causing complete or partial system shutdowns. Dumont suggests that firms carefully question the developers of their database software and telecommunications hardware, as well as their telecommunications carrier, on Year-2000 preparedness.
Keyes said international communications will be especially affected by the Year-2000 problem. "British Telecom has already warned customers that they will not place or take calls from countries with telephone systems that are not Year-2000 compliant," he said. "As the millennium arrives, there may well be places effectively cut off from worldwide communications."
Personal Software
Tabb said one major problem overlooked by most Year-2000 analysts concerns personal software built in Excel, Lotus 1-2-3 and similar financial-modeling programs that many traders depend on.
"They rely on these models on a day-to-day basis to value their own arbitrage possibilities, to get a view on the value of companies or for an idea of where the market is headed," Tabb added.
Tabb noted that since these models are maintained by the traders themselves, in-house technologists are limited in the assistance they can provide. "No one even knows how many traders are using these programs," he said.
Scott Saber, senior vice president of business development at VIE Systems, a computer-systems consulting company based in Lyndhurst, N.J., said the potential for an industry-wide meltdown "definitely exists."
But he also noted that the effects probably won't be distributed evenly across firms.
"There's a huge difference between what a Morgan Stanley, with all of its resources, can do to solve their problems, and what a smaller firm can do on its own," Saber said. He expects that most of the major trading firms and their partners will have their systems basically under control by Jan. 1, 2000.
"But some smaller firms may slip past the deadline and suffer dire consequences," he added.
According to Saber, a former buy-side trading technology manager at investment banking giant Morgan Stanley, Dean Witter, Discover & Co., firms have three options: fix problems themselves, go to each system's vendor for help or work with a Year-2000 consulting firm.
"In reality, the complex nature of the Year-2000 problem is forcing many firms to use all three options," he said.
Triage' Approach
Jessica Keyes, president of New Art Technologies, a New York-based Year-2000 consulting company that works with securities firms, said many of them are taking a "triage" approach to Year-2000 problem-solving.
"Firms are facing threats on so many different fronts, that they're taking stock of every system they have and they're figuring out what must absolutely be changed first," said Keyes (no relation to Tony Keyes).
"With any luck, this approach may allow them to sidestep a major catastrophe, but will still probably permit minor bugs to slip though," she added.
While many trading firms will be pushing their system-conversion deadlines right up to the current millennium's end, the government is in even worse shape.
"Traders rely on a good deal of government-generated information," Jessica Keyes said. "Unfortunately, the latest assessment is that over half of all government agencies won't complete their Year-2000 projects in time."
She said that shutting off even a fraction of the government's information flow "will make it a struggle" for traders to continue their business as usual.
Jessica Keyes added that information from other governments is at even greater peril. "Even if by some miracle our government and private-sector entities convert all of their mission-critical information systems in time, we could still be completely undermined by the rest of the world not getting their job done," she said.
SIA Priority
Straightening out potential Year-2000 pitfalls has been a top priority of the SIA, Panchery said.
Panchery noted that while the SIA is providing guidance, it is up to individual firms, as well as traders themselves, to make sure that their systems are compliant.
"No one organization can help everyone," he said. "We're attempting to provide a framework that companies can use to meet their Year-2000 goals." The SIA has posted a variety of Year-2000 information, including a recommended timeline to its world-wide-web site at: http://www.sia.com.
While work continues at a frenzied pace, Panchery is optimistic that the industry can successfully navigate its way through most Year-2000 perils.
"Next year's testing, which will show how well firms work with their partners on Year-2000 compatibility, will mark a big step toward achieving the goal of widespread compliance," he said.
Madoff said that there's still time for the industry to escape relatively unscathed. "If everybody meets their conversion deadlines on time, then there should be little or no impact," he said.
But Tony Keyes' outlook is gloomy. "There's no way of telling exactly how bad it's going to be, but the negative ramifications will be felt well into the next century," he said.
