The speed at which modern securities transactions can be executed is at the center of a fascinating debate. The debate concerns the Intermarket Trading System. That's a system which links the NYSE and the other national securities exchanges, as well as Nasdaq, making possible the routing of listed stock orders. Earlier this year, the exchanges started a pilot program that reduces to 30 seconds, the maximum time allowed for participants to respond to orders coming from others on the ITS. Before that, exchanges had as long as 60 seconds to respond. Either way, the length of time is arbitrary since many participants could respond immediately, certainly within seconds, on many orders. However, things are not that simple on Wall Street.
The ITS is important right now to outfits such as the Archipelago Exchange and Island ECN. Island hopes to follow Archipelago's lead in becoming a securities exchange. Exchange status provides a direct line to the ITS (as well as a direct line to the National Consolidated Quote System which broadcasts members' best prices in listed stocks). Archipelago thinks 30 seconds is an eternity in modern securities transactions. Island argues that half a minute is similarly slow for an ECN like itself which can execute orders in split seconds. Those 30 seconds – about the length of time it takes to quaff a bottle of beer in between sessions at a securities industry conference – seems too long. Other agree with Archipelago and Island that the 30 second rule is flawed. Those who believe that the ITS has a case of the slows include Instinet and the New York Stock Exchange. The latter has publicly stated it would be happy to leave the ITS. So why not force a more real-time approach? Why not scrap the ITS? "The traditional market participants, who have the greatest say in the governance of the ITS, probably don't relish the thought of the electronic marketplace gaining significant market share," said Andrew Goldman, a spokesman for Island. "The electronic marketplace has about a seven percent market share of listed business compared with one out of every two trades executed right now on Nasdaq, where competition has been good for investors."
What makes the debate even more fascinating is the issue of trade sizes. While the ITS is a critical part of a market that handles various sized orders, large blocks are not orders that can be easily turned around in seconds. The 30 seconds that folks are questioning with the ITS is essentially a phenomena of the retail markets. As the evidence shows, you don't usually finish a block trade – even though it represents greater value and more capital than a 100-share trade sent by Aunt Millie in Arizona – in warp speed. One study showed that only about 20 percent of the value of institutional buy orders is completed within a day; and less than half within four days. "Speed on partial executions might be important; that is, an institution might want to smack a bid they see," said one buyside trader. "But overall, quality of execution on a very large order is more important than speed. Day traders and hedgies care about quickness; firms like ours are more concerned with liquidity." The issue of the ITS, another battle that could be waged on behalf of Aunt Millie – oh, how we love her – could erupt into open regulatory warfare in the months ahead. This could turn nasty.
John A. Byrne
Editor
