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September 30, 2000

Regional's Virtual Stock Exchange Plan: Specialist Charles Schwab Operates Out of Remote Office

By Peter Chapman

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  • Regional's Virtual Stock Exchange Plan: Specialist Charles Schwab Operates Out of Remote Office

In a move that high- lights the evolution toward virtual stock markets, blending multiple dealers with central limit order books, a regional exchange is introducing technology that lets specialists make markets away from the floor.

The debut of BEACON REMOTE by the Boston Stock Exchange follows approval by the Securities and Exchange Commission in August, to extend Boston's BEACON trading system for specialists who choose to trade from their offices.

To that end, Boston signed an agreement with Savvis Communications to provide an IP network to link off-floor market makers to the BEACON data center in Woburn, Mass.

Beta testing of the new system began at "select" sites in September, according to the exchange. Charles Schwab & Co., a specialist at the exchange, confirmed it is operating one of the sites.

Despite the changes, Boston insists it's not abandoning its floor. Indeed, it only just moved to a prominent street-level location in early 1999 from the 38th floor of a Boston high-rise.

"We look at the floor as an investment in the town," said exchange president James Crofwell. "We invite in customers and students. We're committed to that."

Crofwell claims the plan is to bring in new blood that doesn't want to set up a floor operation. "This is a way to gather more liquidity from people who are elsewhere," he said. "We don't have enough to match up all the naturals. This will bring more specialists into the mix."

Others say the likeliest users are the large national broker dealers who use Boston to trade against their own order flow. Charles Schwab, Fidelity Investments, Morgan Stanley Dean Witter, Pershing Trading Company and Herzog Heine Geduld are the biggest of the exchange's 16 specialists. All are able to take advantage of a competing-dealer program established in 1994 to trade any stock they choose.

Charles Schwab is one specialist that eventually hopes to permanently run its posts on a remote basis.

"We will be involved in the beta testing," said Dave Herron, vice president of listed equities at Schwab Capital Markets and Trading. "Our [deployment] plans depend on how well that works. Transition takes awhile, though, and, as you know, traders hate change."

Schwab is no stranger to remote posts. It became a member of the fully-electronic Cincinnati Stock Exchange last year and subsequently closed its posts at the Pacific Exchange, its long-time home.

It handles its CSE trading from San Francisco and says it could operate BEACON REMOTE from there. Alternatively, it could operate out of its Jersey City trading room or other locations, the firm says.

Jersey City-based Herzog, on the other hand, has no plans to go remote. In addition to its floor operation it also runs an institutional brokerage in Boston. "It's status quo for us," said president Buzzy Geduld. "We've been on the floor for many years. It's a cost efficient way for us to operate." Geduld says higher telecom charges for long-distance trading is also a deterrent. Crofwell acknowledged they are a factor.

Fidelity, Morgan Stanley and Pershing Trading would not comment.

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