In a controversial victory for the New York Stock Exchange, PaineWebber closed all of the regional specialist units managed by PaineWebber Specialists.

PaineWebber had operated specialist units on the Cincinnati Stock Exchange, the Boston Stock Exchange and the Pacific Exchange, covering more than 500 stocks. In all, 35 employees were laid off with the closings. The firm will still manage its specialist unit on the NYSE.

PaineWebber declined to comment on the decision, saying only that it was part of an ongoing reevaluation of the firm's equity business. The firm will retain membership and continue to route orders to the three regional exchanges.

But the move by New York-based PaineWebber was significant in the heated rivalry between the NYSE and the regional exchanges over market share.

"The NYSE is absolutely recruiting business for their exchange," said David Colker, chief executive of the Cincinnati Stock Exchange, on the loss of PaineWebber. "I am concerned for the public investor that 85 percent of the trading in NYSE stocks is done in one place."

The regional stock exchanges function primarily as alternative sources of liquidity for NYSE-listed stocks. The regionals offer low cost structures and slightly different rules for investors looking to execute orders in listed stocks. More than 15 percent of volume in NYSE stocks is traded away from the Big Board.

Citing an interest in investor protection, the NYSE has lobbied with member firms for an increase in order flow. And in numerous instances, the Big Board has succeeded.

In 1995, brokerage giant Merrill Lynch & Co. closed their specialist operations on the regional exchanges, and announced their intention to route all listed orders only to the NYSE. The firm alleged it would get better prices for customer orders at the Big Board.

But Robert Jennings, a professor of finance at Indiana University who studied the move by Merrill, suggested that the firm may have received concessions from NYSE specialists for sending all orders to the NYSE.

"There was probably political pressure for Merrill to pull out of the regionals," Jennings added.

In 1996, the former Smith Barney followed suit. The firm – now a part of New York-based Salomon Smith Barney – closed its specialist operations on the Cincinnati Stock Exchange after sustained pressure from the NYSE.

And when PaineWebber made its announcement on April 16, it was not considered surprising. A source at the Boston Stock Exchange said the firm had given prior indication that it would pull out of the regional exchanges.

The source added that political pressure may have largely contributed to PaineWebber's decision. In fact, Joseph Grano, president of PaineWebber, has publicly remarked on the heavy recruitment made by the NYSE.

"He's [NYSE Chairman Richard Grasso] been yelling at me for three years, saying, 'What are you doing, the order flow should be coming to the primary market,'" Grano said in an April article in the Wall Street Journal.

Nevertheless, Grano has denied that PaineWebber's decision was influenced by Grasso's lobbying or political pressure.

Tumult

Separately, PaineWebber has displayed a tumult within its own equity operations in recent months that suggest a reevaluation of operations.

In November, seven Nasdaq traders left the firm, including head trader Richard Bruno. PaineWebber refused to comment whether the resignations were forced or voluntary. Patrick Davis and William Heenan succeeded Bruno as co-heads of over-the-counter trading. Just two months later, Heenan left the firm to join the Nasdaq desk at Donaldson, Lufkin & Jenrette in New York.

And over the last 12 months, the firm stopped making markets in more than 200 Nasdaq stocks, cutting its list from 735 to 525.

The National Association of Securities Dealers is planning more crack downs on trading scams in non-Nasdaq, over-the-counter securities.

But the NASD's attempts to drive the sleaze artists out of the non-Nasdaq, OTC market could end in disappointment. About 8,000 stocks qualify as non-Nasdaq, OTC securities, trading on the NASD-owned, electronic OTC Bulletin Board, and the manually-traded, independently-run pink sheets.

While the vast majority of OTC stocks are issued by legitimate entities supported by honorable market makers, a small minority give traders a black eye and rouse the NASD's enforcement machine.

The OTC Bulletin Board, in particular, seems to attract much of the criticism.

"The biggest problem in the area of small-cap fraud has been with the OTC Bulletin Board," said Phil Feigin, securities commissioner for the state of Colorado. "There's not very good enforcement of the bulletin-board market."

The OTC Bulletin Board, a somewhat secretive world where the bid and asked spreads can be gargantuan, is perceived as a breeding ground for some of the market's most unscrupulous personalities.

With stock markets scaling new heights, Feigin and others believe that investors' temptations to parlay their capital gains to even greater heights could motivate sinister traders to find avenues to perpetrate their fraud, in the face of new enforcement regulations.

"You can make enforcement harder, but it's not going to decrease the level of fraudulent activity," Feigin said. "These are people with sky-high egos that honestly believe that they won't get caught."

NASD regulators have proposed three initiatives designed to protect investors from being ripped-off by fraudulent broker dealers.

In a release, the NASD said the initiatives proposed:

* Allow only those companies that report their current financial information to the Securities and Exchange Commission, and banking or insurance regulators, to be quoted on the OTC Bulletin Board. (About 50 percent of the OTC companies currently report their financial results to the SEC.)

*Require brokers, before they recommend a transaction in an OTC security, to review current financial statements on the company they are recommending.

*Require that investors receive a standard disclosure statement emphasizing the differences between OTC securities and other market-listed securities prior to the initial purchase of an OTC security.

"There has been a dramatic increase in the number of micro-cap securities in the public market place," said Frank Zarb, NASD chief executive, in a prepared statement. "These measures are designed to ensure that the level of integrity that exists in other parts of the market is achieved in the smaller-capitalized section as well."

At the same time, the SEC has its own proposals on non-Nasdaq, OTC securities that would put more responsibility for investor protection on market makers. At press time, the NASD's proposals are expected to be submitted to the SEC for final approval and public comment.

Investor scams have been around for as long as Wall Street has existed. But today's scams may be more menancing, as evident by well-publicized reports of organized crime infiltrating the OTC market.

Mob tactics on the market-making side allegedly have included the intimidation of legitimate market makers who have refused to artificially inflate the value of stocks. Naked short-selling is reportedly another favorite tactic.

On the retail-brokerage side, scam artists have used the infamous three-call, cold call. A broker blindly throws out feelers, asking investors whether they would be interested in positive news affecting a security, calls a second time to reinforce that interest among naive investors, and closes the sale when the purported positive news develops.

Some brokers dupe a "reload list" of investors snared in the past; others dupe affinity groups or associations. Another tactic is sales of stocks in companies registered out of state, making it difficult for investors to get specific information about a company's operations.

When investors do purchase a stock and later decide to sell, corrupt brokers either won't be available or will require the investor to purchase a different stock in order to get out of their current position, Feigin said.

To be sure, the NASD has generally been tightening listing standards in the full universe of OTC stocks to help fight sleaze. And many investors are happy with how their small-cap and non-Nasdaq OTC holdings are traded and perform. Indeed, many good companies have no option but to go public on the OTC market.

"We really had no choice," said Gary Placek, head of syndicate operations at Robert W. Baird & Co., a Milwaukee-based firm, which placed OTC offerings for Tarpon Coast Bancorp (OTC:TCBA) and Macatawa Bank (OTC:MCBC), two new names on the OTC Bulletin Board in 1998.

"These are de novo banks that wouldn't have been able to qualify for Nasdaq Small-Cap listing, and certainly not for National Market System listing," Placek said. "They're not projected to make any revenues for a couple of years."

The initial listing of all stocks trading on the OTC Bulletin Board requires sponsorship by an NASD-affiliated broker dealer.

At press time, market makers in Tarpon included: Alan C. Ewing & Co.,Tampa; Hill, Thomson, Magid & Co., Jersey City; and Paragon Securities, New York. Market makers in Macatawa included The Ohio Company, Columbus, Ohio; Herzog, Heine, Geduld, Jersey City; and Monroe Parker Securities, Rochester, N.Y.

"It's turned out to be a real nice market for [the two banks]," said Placek. Both of the companys' stocks have benefited from investor appetite for community banks, Placek noted. Tarpon closed trading April 28 at 15 3/8, 53.75 percent above its Jan. 26 debut at $10 a share. Macatawa closed the session April 28 at 15 3/4, 57.5 percent above its April 1 debut, also at $10 a share.

All told, 1,200 new companies made the pink sheets and the OTC Bulletin Board their home last year. Of that number, 14 companies went public via the OTC Bulletin Board, raising $102.4 million in new capital. These include four banking entities; three healthcare-related companies; two issuers from the high-tech and telecommunication sectors; two food wholesalers; two miscellaneous holding companies; and one foreign entity.

The average return above offering for these companies through the close of trading April 28 was 6.86 percent.

While market sources believe the NASD initiatives give investors more protection, others suggest additional steps may need to be taken.

"After being in this business for 30 years, you realize there's no silver bullet," Feigin said. He suggested that closer cooperation, including reciprocity agreements between federal regulators and state regulators, might help.

"The NASD and the SEC could beef up their enforcement actions if they were permitted to take into account an order issued in a particular state," he said. Under the current laws, individuals convicted of security fraud in Colorado by Feigin's office can escape detection by moving to any of the other 49 jurisdictions.

Michael Robinson, a spokesman for NASD Regulation, the NASD's regulatory arm, declined to comment on these laws, but he did note that federal regulators are considering at least one other alternative, potential authority for the NASD to halt trading in OTC Bulletin Board securities under certain circumstances.

Internet-based networking technology is heading toward the trading floor, promising traders faster and easier access to a wide array of market data and analytics.

The technology has spawned Intranets, linking traders to each other and to information resources both inside and outside their firms.

Intranets are a type of private network using Internet technology to allow electronic communications among users. A company e-mail system is a good example.

As Intranets begin arriving on trading floors over the next few years, desktops will undergo radical transformations.

Standalone computer workstations and terminals will be replaced by "thin clients" – stripped-down PCs costing as little as $500 – that are designed specifically for Intranet use.

Intranet technology's impact on traders will be immense, said Lawrence Tabb, group director of The Tower Group, a Newton, Mass.-based firm that analyzes technology trends in the banking and securities industries. "Intranets will give traders a degree of data flexibility and integration they can now only dream about."

According to Tabb, the era of separate terminals handling individual proprietary data feeds will pass into history.

"Traders will be able to receive information provided by a wide variety of suppliers, fed directly to their workstation via an Intranet," he said. "Their biggest problem will be finding the best sources in a sea of information."

Cheaper Information

Much to the consternation of proprietary financial-content providers, a great deal of the information Intranets can pull in from the Internet is comparatively inexpensive, or even free.

While not a substitute for the proprietary news streams, the materials traders can have delivered to their desktop from the Internet provide an additional level of information and analytic support.

TheStreet.com (www.thestreet.com) attracts subscribers with yearly fees of less than $9 per desktop, depending on the Intranet's size.

The information on the web site isn't as deep as the content carried by the proprietary providers, but is still quite extensive, and includes company news, opinion columns, delayed and historical quotes, Securities and Exchange Commission documents and intraday and historical charts for more than 24,000 stocks, funds and indices.

Alan Maguire, strategic sales manager for TheStreet.com, says the upstart service fills a previously empty niche.

"Prior to the arrival of companies like ours, information was primarily the domain of established vendors, like Reuters or Bloomberg, who covered the markets with plain facts, or research houses," he said.

"They have often an axe to grind regarding the markets and companies they comment on," Maguire added. "We bring a fresh, original approach to financial news by delivering an unbiased, insider's view of the industry."

Free Source

A free, Internet-based information source traders can turn to is BusinessVue 2.0 (www.businessvue.com), a program that pulls together information from multiple sites and sends it to traders through their Intranet-connected desktop.

In its final test stages at press time, the software allows traders to obtain corporate profiles, current and archived news stories, analyst recommendations, SEC filings and delayed and historical stock quotes. The product can also export data to a variety of standard business programs, including Microsoft Word and Microsoft Excel.

"We're ancillary to the Bloomberg machine and other products traders are using. We provide another data stream they can use to make informed decisions," said Denny Michael, vice president of marketing for Alpha Microsystems, the Santa Ana, Calif.-based company that publishes BusinessVue 2.0.

Although the advertiser-supported software and content is available at no cost, Alpha also markets an advertising-free version (with customized data feeds) that more closely resembles the service offered by proprietary-content providers.

Costs start at $10,000 per site, plus monthly and per-user fees that vary according to the size and scope of the Intranet. Michael believes that all financial information will eventually be delivered to traders via the Internet and Intranets.

"You're already seeing the proprietary providers moving in that direction," he said. "The stranglehold these companies once had is being eliminated by the Internet."

Information Overload

While Internet and Intranet-supplied data streams offer traders an almost unlimited array of information sources, the sheer volume of incoming material can pose a problem similar to that of visiting an all-you-can-eat buffet – serious indigestion. Combine Internet and Intranet-supplied data with proprietary feeds, and the situation can be overwhelming.

"Simultaneous access to data from multiple real-time and historic sources is a critical problem confronting the trading floor in virtually every firm today," Tabb said. "The ability to access multiple data sources from an integrated graphical interface meets a critical need."

To answer the problem of information overload, Leading Market Technologies (www.lmt-expo.com), a Cambridge, Mass. software developer, has created MarketBrowser.

The Intranet-based charting and graphing solution aims to help traders view and analyze market data from multiple sources simultaneously. The product integrates Reuters, Open Bloomberg, FAME, LIM and other major sources of real-time and historical financial-market data, as well as a wide selection of Internet and Intranet-delivered information.

"Different data formats and communications protocols across multiple market-data sources has often meant that traders, for example, either can't get the data they need, or require multiple terminals to display it," said Jay Smith, chairman of Leading Market Technologies. "Even then, they can't combine data into the same application. MarketBrowser solves these problems."

In addition to its information-sorting capabilities, MarketBrowser provides an on -screen button bar to allow quick changing of the symbol or periodiciy of any chart. The software also includes facilities for drawing trend lines, annotating charts and printing. Users can cut and paste MarketBrowser charts and graphs to Microsoft Office and other PC applications for use in client reports and other documents.

Knight Securities, a Jersey City-based Nasdaq wholesaler, is a MarketBrowser user. "We bought MarketBrowser because we didn't want to depend on a data vendor for our charting and analytics," said Kenneth Pasternak, Knight's president and chief executive. "With MarketBrowser, we get an outstanding graphical display of market data and the ability to choose whatever data sources we want."

Intelligent Agents

Intranet-linked workstations can also take advantage of powerful software search tools, known as intelligent agents. Intelligent agents are self-contained programs that can be tailored by users seeking specific types of information.

Data Grabber, an intelligent-agent program from Cyber Vista (www.cybervista.com), allows traders to automatically harvest data from an array of online sources, including information services and web sites.

A trader could, for example, instruct Data Grabber to capture stock-quote information at designated times, and have the data automatically placed into a spreadsheet for analysis. The software can also be used to monitor web sites for product announcements, financial statements and other types of breaking information.

Nicholas Roche, vice president of sales and marketing for San Mateo, Calif.-based CyberVista, said Data Grabber can help traders quickly zero-in on key information. "Data Grabber acts like a silent assistant, collecting information and allowing traders to follow all markets 24 hours a day," he said.

Roche noted that the software can even alert a trader to breaking information while away from the desktop. "Data Grabber can be linked to a user's e-mail, alphanumeric pager and fax machine to deliver information anytime, anywhere," he said.

Streaming Media

Another powerful Internet and Intranet-oriented technology that will likely impact traders in the years ahead is streaming-media technology, which delivers live or pre-recorded video and audio programming directly to the desktop. Streaming media is already available to firms with networked trading floors.

Mountain View, Calif.-based Starlight Networks, for example, offers StarCast, a streaming-media product that provides live and on-demand video and slide presentations within a standard web browser.

James Long, Starlight's chairman and co-founder, said potential StarCast applications include company announcements, corporate presentations and training seminars. "It really opens the world to traders," Long said.

"A trader can get video in a window on his desktop. He can correlate the information he's getting from the video feed to market information he's looking at concurrently," he added.

According to Long, brokerage giant Salomon Smith Barney was the first major financial-services company to embrace StarCast. The company deployed the technology on its 11,000-user corporate network last fall.

"Smith Barney uses the technology to broadcast live analyst briefings to desktops at its New York headquarters and in 470 branches nationwide," he explained.

Small Firms Lead

A few major firms, such as Salomon Smith Barney and Merrill Lynch & Co., have already begun installing Intranets, primarily as a low-cost way of linking together globally-dispersed employees.

But smaller firms will likely lead the industry's move toward Intranets. "Small companies can move faster because they don't have as many desktops to convert," said Rob Enderle, a senior analyst at Giga Information Group, a technology research firm based in Santa Clara, Calif. "Also, small companies don't have the financial investment in big, iron desktops like the major firms, so it's easier for them to make the decision to move to the new technology."

While Intranet technology has been available for several years, system security worries have slowed the technology's arrival on the trading floor.

"People have the feeling that anything that connects into any part of the Internet is a security risk," Tabb said. But firewalls, hardware and software combinations that prevent unauthorized data streams from entering an Intranet have become sophisticated enough to thwart the skills of even the most skilled hackers, he noted. "Intranets are really quite safe," Tabb added.

But it will still be a few years before the industry begins to widely embrace Intranets. Most firms are taking a wait-and-see approach, Tabb said. "Intranet distribution is still quite new, and most trading-floor managers are waiting to see how the technology evolves," he added. "No one wants to be among the first on the bandwagon."

It was 3:50 p.m. EST on Wednesday, and the market was stable. The New York Stock Exchange was set to close in ten minutes. A trader posted a trade of 1,100 shares of United Technologies at 11 3/4. The problem was that the previous trade had been printed at 111 7/8. The trader posting the 1,100-share print had left a digit off his quote.

The erroneous trade caused a five-percent tailspin in the Dow Jones Industrial Average minutes before the closing bell. The error turned a 40-point rise in the Dow into a disastrous 257-point drop.

Sound far-fetched? It shouldn't. Trading errors happen all the time.

The lost digit that Wednesday – July 31, 1996 – created a panic on the floor and nearly set off the NYSE circuit breaker for the first time. But six minutes after it appeared on the tape, Big Board officials had unraveled the error and printed a correction, posting the trade at 111 3/4. The Dow was recalculated, and closed with a 47-point gain.

In the impassioned and imperfect world of Wall Street trading, erroneous trades are an accepted reality. Most traders attribute slipups to miscommunication or human error. But as desks rely more on electronic systems to route and execute orders, trading errors have been reduced dramatically.

"Ten years ago, I would say my desk averaged 15 errors a week," said Paul Chalmers, director of international trading at Canaccord Capital in Vancouver. "Today, traders are more careful, and systems handle orders with less human intervention. My desk is down to maybe two errors a week."

Handling Errors

Dozens of situations can lead to an erroneous trade. Stock symbols assigned incorrectly. Selling shares for a buy order. Assuming order information. Moving too many – or too few – shares.

Generally, trading veterans outgrow youthful recklessness and take care to handle orders more efficiently. Learning from past mistakes is part of that maturing. Richard Holway, director of equity trading at Investment Advisers in Minneapolis, still remembers every detail of his first error. He has handled every order since with greater caution.

"A portfolio manager asked me to buy 12,100 shares of ADP, Automatic Data Processing," Holway recalled. "Even though its referred to as ADP, its stock symbol is AUD. I entered the order as ADP, and wound up buying shares of Allied Products."

After that mistake, Holway began echoing the corporate name and stock symbol to the portfolio manager sending him an order.

When an error has been made and the order executed – like in Holway's mistake – the execution will stand. The desk making the error will take the position as a holding of its own, and will fill the customer order as originally intended. The inadvertent order is never the responsibility of the customer.

Because most desks will absorb a trading error as a holding of its own, many firms establish an account to handle positions obtained through errors.

But not all mistakes turn out to be disasters. Tom Norby, head trader at Black & Co. in Portland, relayed the story of a sloppy trade turning a profit.

"A position trader at a firm we deal with was forced into a print of a stock he didn't own," Norby said. The trader, in effect, sold stock to a customer to fill an order without owning shares of that stock. Normally, a trader who has shorted a stock buys the necessary shares later in the day, hoping to fill the order at a price slightly lower than the current quote. But the position trader was unable to fill the order before the close of the trading session.

Ending the day short can be disastrous. If news about a stock breaks before the market opens the next day, that stock's price could climb, and a trading desk could be forced to pay a higher price to obtain shares. Committed to selling the shares at the lower price of the previous day, the desk would incur a loss.

But this position trader – short 500,000 shares – was lucky. News before the opening negatively impacted the price of the stock, driving it down. "The desk was able to buy the shares to fill the order at a much cheaper price than it had sold the shares," Norby said. "The sloppy trade allowed the desk to turn a profit."

Norby and Chalmers – like all sell-side traders – are dependent upon order flow, so they stressed a willingness to absorb mistakes for clients.

"We'll bend over backwards to try to smooth out an error," Chalmers said. "We look at it as if the client is always right, and we work to get that position cleared."

Although usually willing to take a position with an erroneous trade, Chalmers said his desk will investigate the order trail to determine how the error was made.

"Our trading lines are recorded, so we can check who made the mistake," Chalmers said. "Even if the mistake is not ours, we will usually take the hit, but we want the client to know who made the error."

A few months ago, Chalmers telephoned a client's chief executive to say that one of the client's traders had made five errors with Canaccord in six weeks. Covering all five mistakes for the client, the errors were a significant burden to Canaccord's account. The chief executive apologized, and agreed to increase his order flow to Chalmers as restitution.

"The majority of the time, people try to help each other out to clear an error," Chalmers said.

But erroneous trades are not always worked out amicably. If both sides of a trade are positioned in the market as adversaries – like a market maker and a day trader – the desk making the error will often wind up with the position.

Exchange Policies

When an error between two individuals cannot be worked out amicably, exchanges offer alternatives for settlement.

At the NYSE, a trader or floor broker with an unresolvable error can either file for an arbitration proceeding or agree to a judgment from NYSE floor officials.

A judgment by floor officials is the more widespread of the two formal alternatives, and an NYSE source cited the immediate, impartial rulings as the reason for its popularity. When an error must be cleared, floor officials – member floor brokers and specialists – promptly convene with the two parties on the floor and offer a ruling, understood to be final by the two disputants.

Somewhat less popular, but decidedly more official, arbitration proceedings can take months to offer a decision and clear an error. The arbitration decision – handed down by an independent NYSE panel – are also considered final. An arbitration decision can only be appealed on extremely narrow grounds.

The National Association of Securities Dealers also holds hearings for members before an independent arbitration panel. When an error cannot be worked out between two parties, a source at the NASD said that arbitration is the means by which the error can be cleared and capital reallocated.

The NYSE and the NASD offer arbitration proceedings to members for all transaction errors, irrespective of where the trade was executed.

A complaint can be filed with the NASD to alert the agency of a problem with a member firm. But an NASD source stressed that filing a complaint will not settle a trade dispute. Rather, a complaint will alert the agency of an ongoing problem, resulting in an investigation by the NASD's regulatory subsidiary, NASD Regulation. Last year, 5,000 complaints were investigated.

When an error results from a processing mistake – like the missed digit in the United Technologies trade – the NYSE's floor-operations staff will team with floor officials to investigate the reporting mistake. The mistake is corrected and filed with NYSE market surveillance.

On Nasdaq, features of the electronic systems have significantly limited processing errors. With a computerized order trail, erroneous trades can be tracked and corrected quickly.

Electronic Safeguards

Across all markets, the widespread use of electronic trading systems has markedly reduced the occurrence of processing errors on desks. Industry vendors market products designed to reject erroneous trade data entered on workstations. Most programs provide pop-up screens, enabling traders to quickly review data before an order is transmitted for execution.

TradeRoute, a routing system for small institutional-sized equity orders sold by Boston-based AutEx, touts its ability to protect traders from processing errors. (AutEx is a unit of Thomson Financial Services, parent of Securities Data Publishing, publisher of Traders Magazine.)

"We promote the fact that our system eliminates mistakes," said John Spensieri, TradeRoute's business manager. "TradeRoute prevents errors by eliminating exposure where errors occur."

Spensieri cited front-end safeguards that will cancel any order entered with an invalid symbol or trade size. After a valid order is entered, the system requires the sender to review trade information and approve the routing of the order.

Most TradeRoute orders are executed within minutes, so traders are alerted to erroneous trades almost immediately.

"It is so important to catch an error quickly," Holway said. "The worst errors are the ones you don't catch right away. The ticking time bombs."

On Nasdaq, the Automated Confirmation Transaction system (ACT) sets time limits for reporting trade details, helping to keep erroneous data from festering.

ACT is the automated Nasdaq service that receives and matches trades for transmission to the National Securities Clearing Corp. prior to settlement at the Depository Trust Company. In addition, ACT disseminates last-sale information, and sends same-day confirmations and reconciliations to traders. Participation by NASD member firms is mandatory.

Market makers are required to enter trade details on all transactions within 90 seconds of execution. Order-entry firms have 20 minutes to report details of orders executed by market makers. Under certain circumstances, firms must decline and cancel trades entered in ACT.

Clearing firms that execute and process trades for smaller broker dealers have an electronic link to ACT, which helps monitor their correspondents' trading activity and market exposure. ACT will automatically flag the clearing broker whenever a correspondent has exceeded the clearing firm's credit parameters.

A trade is locked when both parties enter identical details. A locked trade is then routed directly for settlement. A trade executed on SOES, for example, is immediately locked.

But no system will eliminate every human error. "You can never get around inputting wrong information," said John Davidge, sales manager of New York-based Davidge Data Systems, operator of DAVNET, an order-routing system. "Systems don't make mistakes, people do."

Indeed. On March 26, 1992, two clerks at the former Salomon Brothers began routinely entering computerized sell orders in some of the NYSE's biggest stocks two minutes before the market close. But the clerks had misinterpreted the order to sell $11 million of stocks as 11 million shares.

The sudden wave of sell orders drove stock prices lower as traders on the floor scrambled to find matching buyers. The Dow, which at 3:58 p.m. EST had been up nearly 13 points, finished down 1.57 points. At the time, Big Board sources said the entire loss in the closing minutes was attributable to the Salomon trades.

Because the orders were executed validly – prices and symbol information were correct – the trades could not be canceled. Salomon was handcuffed to the inadvertant position, which was estimated to have cost the firm $500 million.