Commentary

Salil Pachare and Ilia Rainer
Traders Magazine Online News

Does the Tick Size Affect Stock Prices?

The Securities and Exchange Commission has recently released a whitepaper examining the change in tick sizes on trading based on data it collected during the Tick Size Pilot.

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July 31, 1998

Getting the Right Partner to Clear Your Trade Volume: A Clearing Broker's Size Does Help, But Sma

By Staff Reports

Aug. 1, 1999 is the deadline for sending electronic order data, while all manual or non-electronic orders must be covered by July 31, 2000. The first deadline is March 1, 1999, when orders received by electronic communications networks (ECNs), or at the trading desks of markets makers, must be reported via OATS.

Some firms, to be sure, will probably hum along smoothly in the new environment taking root. But these firms are most likely already equipped with the software requirements involved for OATS. Many others, however, are now mulling deals with clearing firms similarly equipped, or are eating up the costs with in-house systems.

The regulatory climate is unquestionably changing how clearing firms do business. Nasdaq trading desks say one of the biggest changes is the order handling rules. These rules have had a noticeable impact on how trading desks use electronic brokers, or so-called ECNs.

The rules require trading desks to disseminate an investors' superior limit-order price-quote information to an ECN, to another market maker, or else have the order executed by the desk. The assumption that this would somehow result in increased business for ECNs is not quite true.

While ECNs overall have likely seen an increase in business, the proliferation of new ECNs has cut into the bottom line of long-established players.

At the same time, the cost of executing trades on ECNs has made them a ripe opportunity for progressive clearing firms. Bear, Stearns & Co., the parent of one of Wall Street's largest clearing firms, is promoting a consortium-supported ECN, STRIKE, among its base of correspondent brokers.

Bear Stearns' strongest marketing tool may be its pledge to charge substantially lower commissions on executions.

That, of course, could trigger a price war in the short term, but correspondents will not be complaining. "If it lowers our cost of doing business, that's great," said one Bear Stearns correspondent, smugly.

Internet Technology

The explosive growth in the use of the Internet on Wall Street for online trading, data distribution and other communications is another technological hurdle for some broker dealers. Firms that have not kept pace and lack the know-how, or do not find in-house systems cost effective, are turning to their clearing brokers for help.

In other cases, large clearing firms have developed state-of-the-art systems that are simply too elaborate for smaller broker dealers to replicate, never mind to ignore.

Pershing, the large Jersey City-based clearing unit of Donaldson, Lufkin & Jenrette, is touting its TelExchange, for example. TelExchange is an interactive voice-response system that enables correspondents and their clients to access real-time quotes and account information, as well as trade equities and options using a touch-tone telephone

Clearing firms distinguish themselves with their technology services. This is evident in how clearing firms report transactions to their correspondents, provide electronic access to their fixed income and equity products, and in the sticky legal domain of compliance.

Indeed, on the compliance side, a rash of electronic services are available. Philadelphia-based BHC Securities provides customized online reporting; PaineWebber's Correspondent Services Corp. has a trade-monitor system; Chicago's EVEREN Clearing Corp. has an online tracking system; and Pershing has ComplianceView, an online correspondent-controlled system for monitoring compliance activity.

Compliance