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July 31, 2000

NYSE's Plan To Dump The ITS - Traders Want Changes in Controversial System

By Peter Chapman

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  • NYSE's Plan To Dump The ITS - Traders Want Changes in Controversial System
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Wall Street trading desks were jolted this April when the New York Stock Exchange proposed scrapping the Intermarket Trading System.

The possible policy reversal highlighted the importance of the inter-dealer routing network for listed stocks in a newly-liberalized trading world.

Some dealers do not want the ITS to go away. But they do want changes in its operation.

Third market dealers and regional exchange specialists use the ITS to trade with NYSE specialists. There is a special urgency to the dealers' request for the changes now that NYSE's Rule 390 has fallen.

A significant amount of listed trading is expected to desert the floor for the Street's trading desks. ITS volume is miniscule, but could increase dramatically.

At about 20 million shares daily, according to the NYSE, ITS volume is just roughly two percent of total listed share volume. That's because of the system's anti-competitive rules, non-NYSE dealers charge. Traders in the third market, in particular, say they would use ITS more if the system offered automatic executions and better trade-through protection. Their frustration with ITS forces them to send the bulk of their NYSE-bound orders through SuperDOT. That system costs them money while ITS access is free.

Specialists at the NYSE don't care how they get their orders, but the exchange itself does. The Big Board says it's unfair to expect it to shoulder 70 percent of the operating budget of a trading system that gives competitors free access to its markets. It wants brokers to establish their own links to the various market centers.

Traders dismiss the idea as NYSE posturing in the face of an expected onslaught of competition from Nasdaq market makers and ECNs. Thanks to the Securities and Exchange Commission, both groups are now free to trade all listed securities off-board. The top three retail brokers - Salomon Smith Barney, Merrill Lynch and Morgan Stanley Dean Witter - are all moving some portion of their listed trading in-house.

The SEC made that possible with two moves. It forced the NYSE to abolish its Rule 390 that prohibited NYSE members from making markets in stocks listed before 1979. The regulators then forced the ITS Operating Committee (ITSOC), the system's governing body, to permit Nasdaq dealers to trade those stocks through the Nasdaq link to the ITS.

ITS is the SelectNet of the listed market. And like SelectNet, ITS has its critics. But unlike SelectNet the perceived shortcomings aren't technological. Twenty million shares a day are not likely to cause SIAC's servers to start smoking. (The Securities Industry Automation Corporation, a joint venture of the NYSE and the American Stock Exchange, manages the ITS.) The problems, traders say, are the rules of the ITS and a lack of enforcement.

Faster Executions

At the top of traders' wish lists are faster executions. Third market dealers and certain regional exchanges want all ITS participants to offer automatic executions against their quotes. Currently, only the NASD, the home of the third market, and the electronic Cincinnati Stock Exchange do so. The seven remaining exchanges have resisted auto-ex.