Equities trading is about to change, and change dramatically. Ever since Congress passed the Securities Reform Act in 1975, the Securities and Exchange Commission has been attempting to facilitate the establishment of a national market system for trading securities, using modern technology, to accomplish the congressional mandate.

Initially, the commission got it right. The SEC recognized that the best way to obtain the most favorable prices for investors was by leading the industry towards the development of a new system in which all bids and offers for each security could be entered and queued in price-time priority. First-come, first-served, the traditional American measure of fairness would be invoked.

The name of the feature that would make this possible was variously known as a central limit-order book, or CLOB, composite limit-order file, central limit-order file and electronic book.

The ultimate goal was to get investors' orders into this book or file. There was little consideration of integrating market makers' and other intermediaries' bids and offers as well.

However, in an effort spurred by the economic self-interest of the dealers and coordinated by the New York Stock Exchange deathly afraid of a dreaded "black box" approach to trading the market centers talked the commission out of proposing a CLOB. The CLOB was replaced with the disconnected triumvirate of the Intermarket Trading System, the Composite Quotation System and the Consolidated Tape System. When the SEC approved these three systems, it unwittingly ensured that a national market system, as envisaged by Congress, would be almost indefinitely delayed.

But now, nearly a quarter of a century later, following pressure from large institutional investors and others, recognition has finally dawned on at least one market-center operator that the day of the CLOB has finally arrived. Fragmentation of order flow has reached an intolerable level, and it is time to put Humpty Dumpty back together again!

Nasdaq's proposed trading system, containing a limit-order file permitting both investor orders and dealer quotes to be integrated, has caused consternation among many members of the National Association of Securities Dealers.

"Why," they ask, "should the NASD, our regulator, build a system, partly with our money, which will compete directly against the systems we have built or are building with the blessing and encouragement of the SEC?"

That's a tough question with no easy, satisfactory answer for the dealers. So who's to blame? My candidate is the SEC itself. From the day it wimped out and decided to scrap the CLOB, until now, it has focused on encouraging competition about where to trade, rather than at what price the trades should take place. That makes about as much sense as encouraging competing air-traffic controllers at a single airport.

In addition, having a self-regulator it makes little difference if it is the NASD or the NYSE also operate a for-profit trading system creates irreconcilable conflicts of interest. That became evident in the Department of Justice's and the SEC's investigations of the NASD and Nasdaq, and the civil litigation that cost the industry hundreds of millions of dollars.

What should be done? First, Nasdaq should be privatized, and its ownership transferred to the NASD membership that use the system. The NASD should stick to what Congress meant when the Maloney Act created it: self-regulation.

If a privatized Nasdaq can capture the market, let it do so. If other market centers prove superior, let the market not the government decide on winners.

Nasdaq has two important existing advantages, however. First, it is the largest over-the-counter trading system extant today. Second, and perhaps even more importantly, it embraced the concept of a limit-order book, and linked with the most powerful and innovative facility in the last 25 years, OptiMark, a system though unproven, appears to meet the needs of most institutional investors for low-cost and efficient order handling, minimal market impact and anonymity.

In the meantime, there will be a major battle among the dealers who wish a CLOB would disappear and the executives who make policy for Nasdaq. The SEC will be an interested observer, and will have to balance the needs of investors against the interests of intermediaries. It will be a fascinating fight to watch. The winners, hopefully, will be American and international investors.

Junius W. Peake, a former NASD governor, is Monfort distinguished professor of finance at the University of Northern Colorado.

The creation of a file for the consolidatation of investor orders, or a CLOB, was proposed as far back as 1976 by the Securities and Exchange Commission. But Professor Junius W. Peake believes the CLOB was overwhelmed by dealer objections, causing the SEC to "wimp out." The CLOB finally reemerged as an NASD proposal last December. Peake provided the following chronology of SEC plans as outlined in commission releases.

1976

The commission believes that there is a need for further modernization and improvement of our securities markets…Further, existing limit-order mechanisms are unable to provide nationwide limit-order protection, and thus cannot always provide the degree of protection for limit orders which hopefully could be furnished by a composite book.

Finally, a composite book appears to be well-suited to assuring an opportunity for public orders to meet without the participation of a dealer.

(Securities and Exchange Commission, Release No. 34-12159, March 2, 1976)

1978

The commission continues to believe that one of the basic principles upon which a national market system must be based is the assurance that all agency orders in qualified securities, regardless of location, receive the benefits of auction-type trading protections.

To this end, the commission believes the several self-regulatory organizations should take joint action promptly to develop and implement a central limit-order file for public agency orders to buy and sell qualified securities in specified amounts at specified prices…

The objectives of a central file are relatively simple: to make available a mechanism in which public limit orders can be entered and queued for execution in accordance with the auction-trading principles of price and time priority.

(Securities and Exchange Commission, Release No. 34-14416, Jan. 26, 1978)

1979: The End of the CLOB

The commission received several proposals describing alternative means of achieving the goal of nationwide limit-order protection. The National Association of Securities Dealers submitted a "Technical Plan for the Development of a national market system," describing an electronic facility (based upon the technology and hardware of the existing Nasdaq system) functionally similar to the central file proposed by the commission.

The technical plan contemplates that any qualified broker could enter limit orders into the facility for execution by qualified market makers based upon price and time priority within the system. The NASD's board of governors, however, expressly reserved judgment on the policy and regulatory issues associated with implementation of the facility described in the technical plan.

Specifically, the NASD noted that further study was necessary to determine whether exclusion of non-public limit orders from the central file and whether protection of orders entered in the file against executions at the same price as well as executions at an inferior price would be appropriate.

Most other self-regulatory organizations opposed creation of a central file…These commentators argued that the absolute time priority proposed to be afforded public limit orders entered in the central file would have significant deleterious effects on the exchange-trading process.

(Securities and Exchange Commission, Release No. 34-15671, March 22, 1979)

Two months after being named co-head of Nasdaq trading at Paine Webber, William Heenan left the firm to join New York -based Donaldson, Lufkin & Jenrette. Heenan and Patrick Davis took the helm at PaineWebber in New York after the much-publicized resignation of Richard Bruno in December. Heenen joined the over-the-counter trading department at DLJ.

Jeff Moskowitz joined C.E. Unterberg, Towbin in New York as managing director of equity trading. He was previously a general partner at New York's Genesis Capital Management.

Durango, Colo.-based OptiMark Technologies hired two senior vice presidents of account relations, Anette Kolenda and Richard Yau.

Kolenda, a former White Plains-based IBM general manager of banking, finance and securities, is responsible for managing marketing services to OptiMark's buy-side clients. Kolenda is based in New York.

Yau, also based in New York, is responsible for client liason for sell-side firms and securities exchanges. Before joining OptiMark, he served as director of Salomon Brothers' Asia Pacific Business Technology Organization in Hong Kong.

Wynn Portny moved to Sharpe Capital in New York as an over-the-counter trader. Portny was formerly an OTC trader at New York's Paragon Capital. Sharpe also promoted three assistant traders Allan Hoes, James Kessler and Barbara Payer to equity traders.

Portny, Hoes, Kessler and Barbara Payer report to William Kirincich and Judy Payer, co-managers of equity trading.

Ceaser Fraschilla joined New York-based W.J. Nolan & Company as a senior vice president and syndicate manager. Previously, Fraschilla was a managing director and syndicate managr at LT Lawrence & Co. in New York.

Roger Levine, formerly a partner and head equity trader at Volpe, Brown, Whelan & Co. in San Francisco, moved cross-town to Preferred Capital Markets. Levine is director of equity markets and sales trading at Preferred Capital.

Dresdner Kleinwort Benson North America, the investment-banking arm of New York-based Dresdner Bank Group, appointed Rahul Merchant an executive vice president and head of information technology and operations. Merchant was a senior vice president and global head of technology at Sanwa Financial Products in New York prior to joining Dresdner. He will continue to be based in New York.

Lynne P. Fagan joined the equity-trading department of Brown Brother Harriman & Co. in New York as an investment officer. Before her move, Fagan was a senior institutional clerk on the floor of the New York Stock Exchange for Harvey Young Yurman.

New York-based Nikko Securities Co. International hired Brian Clark as a senior vice president and co-manager of the system's planning division. Clark works with Hiroto Shoji in directing the management and development of systems and technology for the firm's businesses. He was previously with Citibank in New York in a similar post.

Penson Financial Services, a Dallas-based clearing firm, hired James Kubisak as manager of trading operations for its new Chicago office. Kubisak was previously a vice president with marketing and trading operations responsibilities at Dempsey & Co. in Chicago.

Allan Skinn and Mary Beth White also joined the new trading operation at Penson in Chicago. Skinn, formerly as vice president of over-the-counter trading at Sterne, Agee & Leach in Atlanta, was named a vice president and trading manager. White, formerly a trading assistant at Dempsey, was named a Penson equity trader.

Lynette Woodard, a sales trader at Magna Securities in New York, was selected by the Detroit Shock in the Women's National Basketball Association expansion draft. Woodward, a starting guard for the WNBA's Cleveland Rockers last summer, will limit her responsibilities at Magna to play for the Shock. The Shock and the Washington Mystics will join the eight charter WNBA teams in the league's second season this summer.

Tim Norton, a former market maker at Robertson, Stephens & Company in San Francisco, moved cross-town to the Nasdaq desk at Cantor Fitzgerald & Co. New York. Cantor trader Mike Gould will transfer to the firm's San Francisco office to work with Norton.

The National Association of Securities Dealers is splashing $10 million on television commercials that encourage investors to trade more Nasdaq stocks.

A small cash windfall for CNBC and CNN? Nope. ABC perhaps? Nope.

The money, in fact, is paying for spots broadcasted by London-based networks in the U.K. as part of an aggressive effort by Nasdaq's international team to build itself into a supranational stock exchange.

Nasdaq Commercials

"Our research shows that advertising considerably stimulates awareness among retail investors who have not traditionally traded U.S. equities," trumpeted Charles Balfour, senior vice president of Nasdaq's 20-person international outpost in London.

Balfour and his team carefully helped to select the spots. Some of the dollars were spent on commercials sandwiched between a live broadcast of the Super Bowl. More went on breaks between shows that attract London's yuppie community.

The advertisements, which first aired in September, emphasize Nasdaq's technology-heavy listings, and showing viewers shots of Microsoft and Intel. Appetites whetted, viewers are then reminded that more information is available on Nasdaq's website, www.nasdaq.com.

About 18 percent of investments in Nasdaq, most of it institutional, come from outside the U.S. But market research conducted by Nasdaq indicates an untapped market in the U.K. for direct investments in the U.S. stock markets.

Holding back the growth, however, are transaction costs. "Trading out of London is still cost prohibitive," Balfour lamented. "An investor here typically goes to a U.K. broker or U.K. bank, who then goes to a U.K. broker, who then goes to a U.S. investment bank in London, who finally passes it to a U.S. investment bank in New York."

"The whole process," he added, "comes back with considerable costs, including foreign exchange costs."

U.K. advertising is aimed directly at increasing demand for Nasdaq stocks. Increased demand, in turn, would make it more attractive for U.K. brokers to improve Nasdaq dealing services, further driving demand for Nasdaq stocks among U.K. investors.

Indeed, Nasdaq is working with some of the top U.K. stock brokers, including Barclays and NatWest Securities, about launching a share-dealing service on the Internet.

Some investors in the U.K., in fact, already deal directly with the U.K. affiliates of U.S. discounters. Said Balfour: "U.K. investors can now go onto our web site and see just how easy it is to get information on Nasdaq stocks and deal directly with one of the houses here with Internet services, such as Charles Schwab & Co."

How much exactly does it cost to trade a block of stock? "Nobody quite agrees on a standard measure of trading costs," one expert said. "Several measures are used."

Costs head south if the trade beats the intra-day spread, but head back north if the trade results in negative market impact three days after it has crossed.

Soft-dollar rebates reduce costs, and some fees increase costs.

How to measure trading costs may even split the experts.

But more than 90 percent of executives at major investment firms do agree on one thing trading-cost analysis will be more important as a money-management tool over the next five years.

Measuring

According to a survey of 500 institutions by New York-based institutional brokerage Midwood Securities, these executives said trading-cost analysis is fast becoming a widely-accepted tool for measuring trading performance.

"One of the key factors driving it is the growing need for best execution," said Midwood President Terry March.

Among institutions that currently purchase or have their own systems, a large number use trading-cost analysis as a decision-making tool, according to the survey.

Another 29 percent use it for selecting broker dealers; 50 percent use it considering a switch to other broker dealers; and 32 percent use it when deciding how frequently to use them.

Gauge

Moreover, most of the institutions use trading-cost analysis to gauge the performance of staffers; 88 percent use the analysis to measure the performance of the trading desk; and 59 percent use it to chart their portfolio managers.

Almost 75 percent of the respondents prefer a system which measures both the quality of execution and the subsequent market impact of each trade.

One quarter use a system that focuses exclusively on the quality of execution, while 75 percent evaluate trading execution on both a trade-by-trade basis over a period of time.

Outside the U.S.

Half of the respondents stressed the importance of a system that analyzes trading costs in markets outside the U.S.

Sixty-two percent of the respondents reported that they currently use trading-cost analysis. Of those, 76 percent purchase a system, 18 percent use their own system and six percent use both.

Midwood is a nine-year-old New York Stock Exchange-member firm founded by March, a former senior financial officer at New York-based Dillon, Read & Co. (now part of SBC Warburg Dillon Read) and Sanford C. Bernstein. staff reports

John Chalsty stepped down as chief executive of Donaldson, Lufkin & Jenrette, the firm he helped to transform from a mid-sized broker dealer into one of Wall Street's top investment banks and trading powerhouses.

Chalsty, 64, who will continue as chairman at DLJ., was succeeded by Joe Roby, previously president and chief operating officer at the firm. The change temporarily leaves vacant the position of COO.

Chalsty began his career at DLJ in 1969 as an oil analyst. He was named chief executive in 1986. Under his leadership, the firm expanded in the areas of underwriting, sales and trading and investment banking, and revenues grew from $732 million in 1986 to $4.64 billion in 1997.

Roby, 58, began his career as an investment banker at DLJ in 1972.

Separately, on April 1, Claude Bebear will retire as chairman of the Equitable Companies, which is 72-percent owner of DLJ. Bebear will be succeeded by Henri de Castries, Equitable vice chairman and director.

Equitable's majority shareholder is global giant AXA Group. Bebear will retain his post as chairman of AXA's executive board.

Goldman, Sachs & Company, the last privately-owned U.S. blue-blood investment bank, seems to have it all: over-the-counter and listed trading that whips up envy on Wall Street, fixed income, corporate finance and equity derivatives business that dwarf most competitors.

But Goldman is still struggling to catch up in a less glamorous business selling to Joe Sixpacks, the retail customers that could transform Goldman into a serious mutual fund player.

Goldman, however, recently took a major step to reverse its fortunes, hiring Ammirati Puris Lintas, the advertising agency in New York that handles the accounts of Compaq Computer Corporation, the General Motors Corporation and United Parcel Service.

The agency will research Goldman's public image before the firm decides whether to proceed with a major advertising campaign aimed at the general public.

Follow Lead

But it seems increasingly clear that Goldman will follow the lead of other major institutional firms, like the former Morgan Stanley & Co., pitching for retail customer's assets.

"It is a strategic imperative to be a retail player over the next twenty years," said Peter Starr, an industry analyst at Cerulli Associates, a Boston-based consulting firm. "As baby boomers retire in the next two decades, investments will be more retail-oriented."

Goldman currently has about $140 billion in assets under management, $8 billion in mutual funds.

Last year, both J.P. Morgan & Co. and Morgan Stanley were involved in major deals centered on expanding their retail asset management.

In June, Morgan Stanley completed its much-publicized $10.3 billion merger with retail giant Dean Witter, Discover & Co. The deal united one of Wall Street's top institutional houses, Morgan Stanley, with one of its top retail houses, Dean Witter.

"The Morgan Stanley merger with Dean Witter changed Wall Street's investment dynamics," said Beau Ogden, a merger and acquisition banker at Salomon Smith Barney in New York. "It let firms know they have to diversify to remain successful."

In July, J.P. Morgan purchased a 45-percent interest in Kansas City-based American Century Companies for $900 million. American Century, the fourth-largest no-load U.S. mutual-fund company selling directly to individuals, manages $60 billion in assets in almost 70 mutual funds. J.P. Morgan manages $234 billion in assets, approximately ten percent of which are in mutual funds.

Financial Obstacle

Goldman, however, has one major financial obstacle it does not have publicly-traded stock with which to make the kinds of aggressive acquisitions made by other firms. "I don't think their partners would welcome a retail firm if it meant they had to go public," Starr said. "But they certainly have the capital to make an acquisition without it."

Goldman, which has 200 partners, earned more than $3 billion before taxes for the 12 months ending Nov. 30, an average of $15 million for each partner.

"With firms priced so much higher than their value in this market, I think Goldman would just rather build their own retail base," Starr added.

One clear sign that Goldman is serious about retail investors: It has staffed a full-time, five-person public-relations team, supplementing the work of outside consultant Ed Navotne.

"Goldman has decided to build a retail business rather than buy one," Starr said. "By hiring an advertising firm and building public relations, they are trying to improve their image among retail investors."

Extended trading hours on U.S. stock markets, once dismissed as unrealistic, may soon become necessary for the success of a pilot program at the New York Stock Exchange.

About a dozen European companies are expected to join the program and begin trading their ordinary shares in multiple currencies within the next 18 months.

Speaking at an industry conference, Big Board President Richard Grasso said the exchange had started negotiations with several companies in the U.K. Italy, Germany and France about listing their ordinary shares in domestic currencies.

More than 300 of the 3,000 companies now listed on the Big Board are non-U.S. issues, and most trade depository receipts, which represent dollar-denominated certificates for an underlying number of shares. Grasso said if the pilot program is successful, the NYSE would have to extend its trading day to up to 20 hours. That, in turn, would likely force Nasdaq to eventually extend its own trading day, experts said.

Silicon Alley, the fabled stretch of downtown Manhattan where New York's high-technology hopes merge with the labor of budding, young computer whizzes, is no Silicon Valley.

Truth is that Silicon Valley, the sun-dappled Santa Clara home to the greatest concentration of more technology whizzes, easily beats Silicon Alley in initial public offerings.

But as IPO volume soared to near-record levels last year, areas sprouting high-technology development may challenge both Silicons. Still, that could be many years hence.

"California's Silicon Valley is still the biggest area for new technology development," said Joe Hammer, director of equity syndicate operations at Boston-based Adams, Harkness & Hill.

However, he added, times are changing. "California and even Massachusetts don't have the lock on technological development that they used to," he said.

Indeed, though California remained the nation's undisputed leader in IPO issuance last year, its slippage as a technological mecca is confirmed by figures from Securities Data Co.

After accounting for 14.5 percent of overall IPO volume, or $7.27 billion in deals in 1996, California-based companies tapping the public market slipped by 25.75 percent to $5.47 billion last year. In absolute terms, the year-over-year shortfall was surpassed only by companies originating in Texas, where issuance fell by $2.87 billion, or 48.29 percent, to $3.07 billion.

While some pundits in Silicon Alley would claim the mantle Silicon Valley of the East, Virginia-based investment banks may think otherwise. The banks, in fact, are gearing up to meet the financing needs of companies, many of them high-technology outfits within Washington's Beltway.

"We're trying to take advantage of what's going on in the area," said James Tyler, managing director of equity syndicate at Richmond-based Scott & Stringfellow. "There's a lot of telecommunications and technology companies along the Beltway surrounding Washington."

Amid the massive cutbacks in the military, companies within that region have had to reinvent their business models around real-world applications, Tyler noted.

On the heels of the Old Dominion State's mainstream-oriented transactions last year, the debuts of several successful technology-focused companies portends a strong new issues pipeline from the state. (Last year's mainstream crop included a Morgan Stanley, Dean Witter, Discover & Co.-led offering, CarMax Group (NYSE:KMX) in February, and a Goldman Sachs & Co.-led offering from AMF Bowling (NYSE:PIN) in November.

The 1997 Virginia class of technology offerings included:

* Template Software (Nasdaq:TMPL), a provider of pre-written software templates designed to reduce the time necessary to write new applications. The Dulles-based company priced 2.1 million shares at $16 a share through a syndicate headed by San Francisco-based Volpe Brown Whelan last January.

* Maximus (NYSE:MMS), an outsourcer of health and human services. The company debuted through New York-based Donaldson, Lufkin & Jenrette last June at $16 a share.

* Hagler Bailly (Nasdaq:HBIX), an Arlington-based consultant to the private and public sectors of the energy, utility and environmental industries. Last July, Hagler Bailly placed 3.15 million shares at $14 each, also through a DLJ-led syndicate.

* Network Solutions (Nasdaq:NSOL), a leading provider of Internet-domain registration services. In September, the Herndon-based company priced 3.3 million shares through a syndicate headed by San Francisco's Hambrecht & Quist at $18 a share.

* Best Software (Nasdaq:BEST), a developer of software tools that address human resources and payroll management. The Reston-based company debuted through an Hambrecht-led syndicate in September with the placement of 4.15 million shares at $13.

Overall, 22 Virginia-based companies tapped the IPO market to the tune of $1.76 billion in 1997, a 172.3 percent leap over the 1996 level. That issuance helped guide IPO volume across the Southeast, the only region of the U.S. to bring more companies public in 1997 than 1996.

This year and beyond, New York-based investment banks will likely encounter more competition from the state's regional underwriters, most of which are building war chests to finance new development in the state.

"We are certainly gearing up in terms of research, corporate finance and institutional sales," Tyler said.

Also, Friedman, Billings, Ramsey in Arlington and Richmond-based Wheat First Union are almost certain to open up their coffers for new business development (following a December self-underwritten public offering by Friedman Billings, and the minting of Wheat First Union after First Union Corp. acquired Wheat First Butcher Singer on Feb. 2).

"I think that if you want to find the true story behind Virginia, you would have to look at Friedman Billings," said Henry Valentine III, director of equity syndicate operations at Richmond-based Davenport & Co.

Founded in 1989, Friedman Billings' $1.9 billion of capital placed via IPOs vaulted the firm to the eighth spot in the 1997 manager rankings, up from the 22nd spot in 1996, according to Securities Data Co. figures.

To be sure, 1997 will go down in IPO history as one of the market's most prolific years, trailing only the volumes posted in 1996. Even so, underwriters owe credit to an unprecedented level of new-equities issuance by foreign companies.

Following a banner year for the IPO market in 1996, when a total of 874 companies raised a little over $50 billion, the amount of new capital raised slipped to $44 billion in 1997, according to Securities Data Co. The domestic component of the 1997 IPO volume fell by $6.46 billion to $33.11 billion, while issuance by foreign-based companies climbed by $459.4 million to $10.89 billion, an all-time record.

Stephen Lacey is associate editor of The IPO Aftermarket, a sister publication of Traders Magazine.

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.