OptiMark

The OptiMark Trading System had a difficult introduction on the Pacific Exchange. As the super "black box" for institutional traders went live, its performance was troubled by limited access to listed order flow. At the early stages, OptiMark was handling roughly one million shares daily. During the summer, that climbed up to three million shares, according to OptiMark's PR firm.

The PR firm credited the recent access to SuperDot for part of the improvement. Some trading pros think OptiMark may shelve plans to go live on Nasdaq this year, given the laundry list of projects on Nasdaq's calendar. The PR firm said OptiMark still hoped to go live this year. Approval for the OptiMark connection is still pending from the Securities and Exchange Commission. A spokesman for Nasdaq said the exchange is still committed to introducing OptiMark before yearend.

Closed Doors

Primex Trading NA, the electronic auction market set to debut next year, has closed its doors to new partners, having signed heavyweights Salomon Smith Barney and Morgan Stanley Dean Witter. "Never say never, but it is not our intention to seek out more investors," said Glen Shipway, Primex' president. "In fact, we had sufficient funds before they came aboard. What they offer is order flow, credibility and resources beyond money."

Formed in June by Bernard L. Madoff Investment Securities, Merrill Lynch, Goldman Sachs, and others, the partnership now includes four of the top five traders on the New York Stock Exchange. They also rank among the top ten Nasdaq market makers.

Primex plans to trade both listed and Nasdaq stocks. But the four NYSE members will be restricted to trading 19c-3 stocks, or those listed after April 26, 1979. That's unless Primex is able to work out a deal with a stock exchange or becomes one itself. It is pursuing both options. For Morgan Stanley, the Primex deal is its fourth investment in an electronic trading system. It has stakes in Archipelago, MarketXT and Britain's Tradepoint Financial Networks. Salomon owns a piece of MarketXT and STRIKE Technologies.

Super Regulator

Arthur Levitt, the chairman of the Securities and Exchange Commission, is floating the idea of a plan to amalgamate the self-regulatory operations of each stock exchange into a single super-regulatory body. Some significant changes could be ahead. The SEC itself is studying the possibility of combining some basic regulatory functions at each exchange. The proposal would be designed to eliminate overlap among regulatory bodies. Levitt is touting his ideas as the U.S. stock markets fragment and change at an unprecedented rate.

The SEC is concerned about a suitable regulatory model for the emerging new structures. Levitt says he favors linking all markets electronically. That could conceivably create the national market system envisaged by Congress in 1975.

New Link

Competition for buy-side traders' large block trades is heating up as a second floor broker completes its links to a major order routing network. Stone Securities, a large floor broker at the Boston Stock Exchange, connected to AutEx's TradeRoute, an execution network that enables the buyside to route orders electronically to the sellside. This summer, A.W. Bertsch, a floor broker at the New York Stock Exchange, became the first floor broker to join the TradeRoute network. Most sellside users of TradeRoute are full-service brokers, but interest by floor brokers is "definitely increasing," according to Sue McFadyen, a TradeRoute account executive.

Floor brokers face competition from alternative trading systems like POSIT and Instinet, as well as exchange systems like SuperDot. Proponents of the TradeRoute link claim advantages. "It's DOT with a conscience," one trader said. A SuperDot order must be broken up and is executed automatically. But an order routed to a two-dollar broker would be worked and might result in a better fill. Sources say the TradeRoute connection is usually used to move very large blocks in liquid names or any size order in illiquid stocks. AutEx's TradeRoute is popular with traders on the buyside because it is free. The sellside picks up their bills.

Liability Lawsuits for Firms That Don't Make Y2K Program ChangesSecurities traders and broker dealers, who think their Millennium computer-bug headaches disappeared once President Clinton threw his weight behind civil liability limits on Y2K lawsuits, have got another thing coming, industry observers say.

The President's action, signing H.R. 775 "The Y2K Act" (P.L., 106-37) which was passed by Congress this summer, limits punitive damages awards to the lesser of $250,000, or three-times compensatory damages for most Y2K-related lawsuits.

The legislation, initially opposed by the president, also provides a cooling-off period and other time-outs designed to encourage disputants to settle their claims out of court. But it may not be enough to protect negligent traders. Experts note that the new Y2K Act offers little protection for companies that haven't taken steps to mitigate the problem for themselves and the businesses and people they work with.

The industry has spent $5 billion so far upgrading and testing computer hardware and software, as well as formulating contingency plans, according to the Securities Industry Association.

"This is the biggest computer technology project any industry has ever undertaken," said Margaret Draper, a spokewoman for the SIA. SIA alone has spent $10 million getting systems ready for Jan. 1, 2000.

The Year 2000 computer problem refers to the inability of many computers built or programmed before the late 1990s to accurately process the change of dates from 1999 to 2000. Since these older computers process dates by their final two digits and assume the century "19" to be a placeholder, it is believed that many of them will interpret the transition from "99" to "00" as taking them back to 1900. Computer experts are uncertain how costly the resulting confusion will be, but governments and businesses have been preparing for the rollover to Jan. 1, 2000 for several years.

So far, there have been few Y2K lawsuits. Jeffrey A. Klafter, partner in charge of the Y2K litigation practice group at Bernstein Litowitz Berger & Grossmann in New York, said he's seen about 40 Y2K-related class-action lawsuits. Only a few involved securities industry firms, he added.

Yet attorneys (including the chair of the American Bar Association's new Y2K subcommittee) have predicted, and businesses live in fear, that the year-end event could produce an avalanche of lawsuits if computer problems cost people money or even their lives.

Klafter and others note that the Y2K Act offers little protection for companies that haven't instituted measures to make themselves more Y2K compliant. Klafter said the new law shelters from damages any defendant who pleads an exceptional and unforeseeable "Y2K upset" incident. But that's as long as the defendant at the time of the incident was in compliance with applicable laws and regulations, including compliance directives from regulatory bodies.

Klafter noted that the Securities and Exchange Commission signaled its intent with temporary rules (15b7-3T, 17Ad-21T, and 17a-9T) this spring. The rules were finalized late this summer to ensure broker dealers and traders make their mission-critical systems Y2K compliant by November 15. SEC Chairman Arthur Levitt has made it clear he does not believe the Y2K Act safe harbor will shield any securities firm that hasn't abided by these new rules.

Alan Davidson, president of the Independent Broker Dealers Association said IBDA members understand the importance of Y2K compliance. "It would be counterproductive not to be able to execute your customers' orders," he said.

But some of the SEC's compliance demands are unreasonable, Davidson said, pointing to the recent announcement of $50,000 fines levied against each of four firms that failed to file Y2K compliance forms in time for an SEC deadline.

"What we have here is not the year 2000 problem, but the year 1984," Davidson said.

Most broker dealers, and securities firms in general, have finished their Y2K readiness programs, SIA's Draper said. They are now moving on to contingency planning. "It's only prudent to be prepared for the unforeseeable," she said.

This fall, the SIA plans to establish a Y2K coordination and communication center in New York, Draper said. Starting shortly before the Friday-to-Saturday year-end rollover, the SIA hub will be staffed 24 hours a day, seven days a week to monitor progress. The hub will have links to member firms, self-regulatory organizations, government agencies and international securities organizations.

Houses in Order

Meanwhile, investment planners feel confident that their houses are in Y2K order. Edward Bambauer, director for financial markets consulting at accounting firm Arthur Andersen in Boston, noted that federal bank examiners recently concluded that less than 0.1 percent of U.S. banks still have outstanding compliance issues. Securities firms are similarly well-prepared, Bambauer estimated.

Yet there is considerable debate about the effect that failures in non-compliant sectors of the economy in the U. S. or around the world, might have on the banking and securities industries here, Bambauer noted. "The estimation of most experts is that [investors'] exposure [to Y2K problems] in financial markets increases as the distance from the United States increases," he said.

Several strands of opinion have emerged among traders and their managers, said Lorraine H. DeLear, vice president of trading at First Allied Securities, Inc., in San Diego, Calif. A lot of investors are just going to ride out the event, she said.

Some traders hear investors voice a "head for the hills" mentality, preparing to sell off everything before the rollover occurs. And some believe that the U. S. – arguably the most Y2K compliant nation and traditionally a haven for capital in flight – may even see a mini-boom after the rollover. That could occur as investors seek a safe place to park their money until the chaos blows over.

Congress will likely be fixated for a few more weeks, on the 13 appropriations bills it must pass to keep the federal government running, Capitol Hill observers say.

But day trading proponents will be fixated on something closer to home – the outcome of a Senate subcommittee hearing recently held on their activities.

Education

"My feeling is that [any potential] legislation will probably head in the direction of further education" for neophyte day traders, said Ray Johns, senior market editor for Monterey, Calif.-based Daytraders.com, a daily e-mail stock report for day traders and short-term investors.

Stricter day trading suitability laws are under consideration.

"I don't think in the real world that you can hold the broker responsible for the trader who wants to trade his or her own money," Johns said.

Such laws would invite abuse by removing personal accountability for making bad trades, he added.

If there's action to come from the federal government on day trading and concerns about market volatility, Johns said, it might come instead in the form of a reduction in margin availability for short-term traders.

Margin Laws

The Federal Reserve has speculated openly about using margin availability as a tool to curtail higher risk activities in the markets, Johns noted.

The Senate Governmental Affairs Committee's Permanent Subcommittee on Investigations announced its hearings on day trading at about the same time as Sen. Charles Schumer (D-N.Y.) said he intended to ask Sen. Phil Gramm (R-Texas) to hold hearings on day trading in his finance committee. Gramm is chairman of the Senate Finance Committee.

A Schumer spokesperson said the senator's original request to Gramm has been withdrawn.

Schumer sponsored legislation, S. 1015. The bill calls for periodic disclosure of online securities transactions, investor protections against online fraud, and a Securities and Exchange Commission study of online trading's effects on the markets. His bill hasn't budged from the Senate Banking Committee since it was introduced.

Other Proposals

At least a half-dozen other securities industry proposals (many only partly concerned with "online trading," and none apparently devoted to "day trading") are pending in either the House or Senate, according to a search of Congress's "Thomas" web site (the popular name for the House website).

Considering the number and political clout of the bills' co-sponsorships, and the pressure of Congress's appropriations deadlines, observers agree that new day trading legislation is unlikely to see a floor vote this year (and perhaps not even in this congress).

The major piece of legislation of general interest to securities traders, S. 900, the Financial Services Modernization Act, is in conference committee. Representatives of both houses are trying to reconcile their different approaches to the deregulation measures championed by Sen. Phil Gramm (R-Texas), chairman of the Senate Finance Committee.

Among many other provisions, the bill would subject banks and bank holding companies to some of the same regulations and registration requirements as brokers and dealers. Banks, in exchange for accepting these regulations, would have more freedom to compete in the financial services industry. President Clinton's plans for the bill are unclear, Washington observers said.

More Business

Traders should look forward to S. 900 becoming law, said Alan Bromberg, professor of corporate and securities law at Southern Methodist University in Dallas. "I think [traders are] going to get more business. The bill will let them," said Bromberg, who helped write the Texas Securities Act.

But it is the securities industry, not the federal government, that traders and their colleagues should first look to for signs of change in their business, observers said.

"There's any number of initiatives that the [National Association of Securities Dealers] has out that are going to directly affect the trading community," said John E. Pinto, executive vice president at DOVER International, a securities compliance and financial services consultancy that monitors developments in Congress.

Continued proliferation and growth of electronic communications networks, and their potential mutation into full-fledged self-regulatory exchanges; initial public offerings at Nasdaq and the New York Stock Exchange; the move to decimalization; and resurrection of the central limit order book proposal, are likely to have a more immediate and profound effect on traders than any legislation pending in Congress, Pinto and Bromberg said.

Star Legislation

Traders are advised to keep an eye on state legislatures and regulators as well.

"States tend to be more alert, agitated and activist, and attract more attention in Congress," Bromberg said. He noted that state legislatures haven't been particularly successful at influencing Congress to consider the concerns raised by state regulatory agencies.

Lately, these concerns include day trading activities. But state legislatures have repeatedly persuaded Congress to remove language from federal legislation that could interfere with the prerogatives of state regulators, Bromberg added.

The New York Stock Exchange hasn't made up its mind. The National Association of Securities Dealers is mum.

But there is just one major issue for others on the proposals to spin off the self-regulatory functions of the stock markets.

"We would want to make absolutely sure that the self-regulatory organizations had the revenue stream to continue to do the job that they do to protect investors," said Marc Beauchamp, spokesman for the North American Securities Admini-

strators Association (NASAA) in Washington.

Beauchamp likened the current securities industry regulatory framework to a three-legged household stool: One leg is the state regulators represented by his association; another leg is the Securities and Exchange Commission; and the final balancing leg is made up of self-regulatory organizations such as NASD Regulation (the NASD's regulatory arm). The later polices the industry from within.

"If any of the three legs of the stool' is weakened," he said, "we've got a problem."

Still Exploring

Ray Pellecchia, spokesman at the New York Stock Exchange, said the exchange's board recently authorized the headquarters staff to continue exploring the idea of an initial public offering.

But there is no timetable for an IPO decision, he said, and "a number of options" are being discussed with regard to the NYSE's self-regulatory functions.

NASD chairman Frank Zarb has alternately suggested spinning off the NASD's regulatory functions into a separate entity, or erecting a firewall between the regulators and Nasdaq members and staff.

The alternatives have given rise to heated debates among stock exchange watchers, and some raised eyebrows in Washington.

For Beauchamp and NASAA, though, the issue is simple: "All we care about is whether our investors are going to enjoy the benefits and protections of world-class regulation. If we're assured that they will, we'll probably support the [spin-off] plan."

Separate Body

A separate regulatory body could even improve the investing climate, Beauchamp said: "I think you might have more independence if you didn't have a stock market as part of the regulators' organizational chart."

The long-term health of any spun-off self-regulatory organization will depend primarily on money, Beauchamp said.

"That's got to come from the marketplace somehow," he said. "It's not going to come from the federal government."