Commentary

John Turney
Traders Magazine Online News

Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

Traders Poll

What is your favorite movie about trading?

Wall Street

23%

The Big Short

13%

Margin Call

6%

Equity

0%

Trading Places

38%

The Wolf of Wall Street

8%

Boiler Room

7%

Arbitrage

0%

Too Big to Fail

5%

Free Site Registration

January 1, 2001

The Big Board's Express' Service: The Big Board has two new systems that allow traders to bypass t

By Peter Chapman

Also in this article

  • The Big Board's Express' Service: The Big Board has two new systems that allow traders to bypass t

In a significant departure for a market noted for the deliberateness of its floor-based auction process, the New York Stock Exchange is now offering automatic executions. The move is the result of member pressure and competition from electronic trading venues.

Two new trading mechanisms, Institutional Xpress and Direct+, will give automatic executions against the NYSE quote to block and small-order traders, respectively. The systems have been designed for traders who send their orders over the exchange's SuperDOT service, want immediate access to liquidity and are willing to forego a chance at a better price found through interaction with traders on the floor.

For the first time, a trader will be able to hit a bid or lift an offer he sees on his screen without waiting for the specialist to manually process the order. Currently, all orders routed to the specialist over DOT take an average of 10 seconds to fill. That's because the specialist tries to fill them at prices better than the best bid or offer by exposing them to the crowd or crossing them with contras on his book.

Auto-ex does not mean the fill will occur instantly. It is, however, a guarantee of the price and the number of shares at which an order is filled.

The two services target opposite ends of the market, but are conceptually similar. Xpress guarantees fills on block orders of 25,000 shares or more as long as the quote being accessed has been displayed for more than 30 seconds. Direct+ guarantees executions on orders of 1,099 shares or less. There is a 30-second wait between executions for the same user to prevent the sending of multiple orders in rapid succession.

Taken together the two devices suggest the Big Board is in the early stages of a makeover into a quasi-electronic communication network - those computerized matching engines that process one-third of Nasdaq's order flow.

In the near future, the parameters of both Xpress and Direct+ are likely to converge, bringing the exchange closer to auto-ex for all orders from zero to infinity. Xpress' 25,000-share minimum is due to drop to 15,000 shares within six months of its deployment while Direct+'s 1,099-share maximum will be reviewed for a possible increase, according to the exchange. The 30-second waits for both Xpress and Direct+ will also be reviewed.

Block orders are still likely to wend their way to the floor through brokers, but the two systems could cut into some of the business of the upstairs traders and their floor brokers, as well as the independent floor brokers.

Specialists could lose commission revenues and will have to modify the way they operate if they want to interact with the orders on a principal basis.

Traders Bypass the Floor Auction

For years buyside traders have railed against a system they say confers second-class status on their SuperDOT orders. They want to hit a bid or take an offer, but, all too frequently, they come away empty-handed or only partially filled. The specialist, nominally their agent, has donned his auctioneer's hat and alerted the crowd milling about his post that a buyer has stepped up. A floor broker then ups the bid and wins the shares for himself.