IS 356 IT for Financial Services

1. http://www..evergreen.loyola.edu/~pptallon/is356.htm IS 356IT for Financial Services NYSE: A View from Within

2. Outline • How does the NYSE operate (say in contrast to NASDAQ)? • Who are the players involved in the NYSE? • Follow an order through the system… • What technologies support the NYSE? • NYSE feels the heat • First from NASDAQ, then from others • Going global • Conclusion

3. Useful link: http://en.wikipedia.org/wiki/New_York_Stock_Exchange Introduction • The largest securities market in the U.S. (estb. 1792) • Physical mechanism for trading of securities via a competitive agency-auction market (double auction) • Labor intensive: open-outcry around specialist posts (not straight through processing) • The key to NYSE’s leadership position has been the amount of liquidity is provides to the market • less a function of its on-going, and somewhat erratic, application of new technologies and systems development • Threatened by NASDAQ and ECNs • Private (membership-based) organization until recently • Predictable reaction to new technology adoption that threatens the positions of the members (if it’s not broken, don’t fix it)

4. Average order range: 198 – 1,058; average order size = 266 in 2011 Trading on the NYSE… in NYSE listed securities Source: http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3000&category=3

5. The Rise of Computer-originated Trades Program trading is about 35-40% of NYSE daily volume 60-80% of volume is computer generated http://nowandfutures.com/fed_watch.html

6. High Frequency Trading http://nowandfutures.com/fed_watch.html http://www.rhsmith.umd.edu/digits/pdfs_docs/papers/nyse_rbv_ver_d.pdf

7. More on HFT

8. Time is Money http://thefinanser.co.uk/fsclub/2009/08/flash-goldman.html

9. Flash Crash (May 6, 2010)

10. How the NYSE used to operate • Orders are sent to a floor broker through a system known as Broker Booth Support System (BBSS) • The floor broker transmits the order to a stock specialist using the BBSS or prepares a physical paper order • cross trade is possible but subject to specialists’ approval • Orders can also be sent directly by the broker through the SuperDot computer system: this eliminates the floor broker, order goes directly to the specialist’s workstation • The broker (or client) may not want this as it shows the clients’ hand to the market at large – the client may want to get a better deal than have the order automatically execute – if they walk over to the specialist, they may get a better price

11. Behind the Scenes at the NYSE (YouTube) Follow an order through the system price quotation client broker w/ member firm SuperDot specialist post runner broker broker floor broker located on the edge of the trading floor updated streaming stock ticket information

12. Specialists (Designated Market Makers)

13. NYSE Technologies • Electronic order-routing system through which NYSE member-firms transmit orders directly to the specialists’ trading post • After execution, a report is sent directly to the member-firm over the same electronic circuit that sent the order to the specialist • Capacity: 2.5 billion shares per day SuperDot • Order-management system that enables member firms to quickly and efficiently process and manage their orders • Selectively routes orders electronically to either the trading post or the booths on the NYSE Trading Floor BBSS

14. NYSE Technologies (cont’d…) • A mobile, PDA-like device enables brokers to receive orders, disseminate reports, and send market "looks," in data and image formats • The monitor is provided for viewing by specialists • Multiple data sources incl.: • Point-of-Sale (POS) books • Overhead "crowd" displays • Market montage • Various vendor services

15. Specialist Trading Post 20 trading posts 1,500 trading booths on the edge Every listed security is traded at a unique post by one specialist. All buying and selling takes place around these posts Specialists manage the market in the specific securities allocated to them. Specialist units can be run as companies or partnerships. There are 12 such firms employing 482 specialists, controlling 2,800 stocks. Specialists can buy and sell for their own account but face stiff controls as they have critical access to order-book information.

16. Trading Floor Tour

17. NYSE Datacenter • 400,000 square feet, Mahwah NJ • Massive redundancy • Scalability (throughput + speed) • Juniper Networks • Speed considerations • Fewer devices = more speed • Colocation facility

18. UK Datacenter

19. Ongoing Developments • Order books are traditionally private as they constitute a source of valuable information • NYSE Openbook (from January 24, 2002) • After-hours trading / 24-hour day trading • Neither currently available (after-hours dominated by ECNs) • Meeting the ECN threat (NYSE Direct+) • Trade through rule in effect since 1975 • Small trades: limit orders up to 1,099 shares • Processes 10% of NYSE daily volume • 30 second time limit between orders • Try to take business from third market: NASDAQ dealers who trade NYSE, AMEX and other stocks • Rule 390 (since abolished by NYSE) • Merged with Archipelago or ARCA|EX (major development!!!!!!!!)

20. NYSE Group stock chart from http://www.cnbc.com. • Europe is the next round in the NYSE vs. NASDAQ fight • NYSE merged with Euronext in 2006 NYSE Group (NYX) is now a publicly traded company

21. Conclusion • Advances in IT has provided the opportunity for processing of orders from the trading desk to the trading floor at incredible speeds • Technology has enabled NYSE to operate more efficiently… but… • The NYSE remains one of the world’s most technologically advanced exchanges and is continually striving to upgrade and enhance current IT • Little possibility that trading will be exclusively electronic (like NASDAQ) and that all trades will be paper-less but that possibility cannot be ignored

22. For Next Class… • Read • Articles on the course website • NASDAQ slides and related materials