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March 1, 1998

How Traders Are Coping With the Year-2000 Bug:Potential for Industry-Wide Meltdown Definitely Exi

By John Edwards

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  • How Traders Are Coping With the Year-2000 Bug:Potential for Industry-Wide Meltdown Definitely Exi

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.