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September 30, 2000

Will the Xpress' Be Fast Enough? Traders Carping Even Before It Runs

By Laura Santini üInvestment Dealers' Digest

As the New York Stock Exchange prepares to launch Institutional XPress, the early indications from the trading community are not positive: the system won't go far enough to give institutions direct access to the floor, some pros say.

At issue is the requirement that an order be exposed to the floor for at least 30 seconds before it becomes "expressable," that is, eligible for remote electronic execution.

"In an electronic world, you don't have time to chat," one mutual fund trader said, let alone expect to be able to wait 30 seconds on an order without having the market move unfavorably, he added.

The system aims to give traders not located on the NYSE floor access in two ways: by displaying quotes on the specialist's book and by providing order execution as long as the NYSE's floor traders have been able to see the order for 30 seconds.

An NYSE spokesman emphasized that the system is one way for institutions to participate in the market.

By sending orders to a broker's hand-held' electronic device, institutions get access instantaneously, the spokesman said.

The information phase of the system went live in June. The system's trading phase is due out before the end of the year.

The buy-side community-mutual fund traders particularly-has been clamoring for direct access to the NYSE floor for years, arguing that being kept in the dark about floor action has put it at a huge disadvantage.

Floor traders, for instance, make decisions about pricing their orders based on where large institutional orders coming to the exchange are priced.

The institutions, on the other hand, are not provided the same information and risk having their orders quoted outside the spread and left unexecuted.

Institutional XPress may be a misnomer. The system will be available to any trader on the buyside or the sellside, as long as he is not located on the exchange floor.

The system also will require orders to be quoted at a minimum of 25,000 shares to be eligible, a requirement the Investment Company Institute in Washington claims is too rigid.

In a comment letter, the ICI pointed out that many institutional orders in small-cap stocks are below the 25,000-share level and will not receive the benefits of the system.

Despite its shortcomings, the system breaks some ground in opening information to big players not physically located at the NYSE, the ICI official and traders said. And it may help to further a trend on the buyside to behave more like a dealer and cut out the broker.

Separately, in another example of how technology is allowing the exchange to provide more direct services for customers is a move by independent floor brokers toward direct interaction with buy-side clients.

Independent brokers traditionally have made their living executing overflow orders farmed out to them by the large brokerage houses.

But Larry Helfant of Lawrence Helfant Inc., a large independent broker on the NYSE floor, said he has several buy-side clients from whom he receives orders directly, via a few dedicated terminals installed in his booths on the floor.

Helfant said dealing directly with the buyside is more lucrative than dealing indirectly via large brokerages. That's because the floor broker does not have to share the commission with the big brokerage house farming out the order.

One hurdle for firms such as Helfant's is gaining name recognition with the institutions. Most of these firms do not employ marketing teams, nor do they operate retail brokerages with widely recognized brands, Helfant said. In addition, he said, small independent brokers face capital and clearing requirements.