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April 30, 2001

Watching NYSE Floor Brokers: OMS Vendors Make Marketing Hay

By Peter Chapman

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Vendors of order management systems (OMSs) are scrambling to position themselves as the New York Stock Exchange pushes its members to automate.

The Big Board is requiring floor brokers to enter the details of all orders - before trading occurs - into an OMS that will communicate with the exchange's new regulatory database. That's expected to result in better monitoring of brokers. It could also result in more business for vendors.

Entering details after the trade occurs will no longer be allowed. Nor will paper records be acceptable. Floor brokers have until September to comply with the rule. The deadline for upstairs traders is due to take effect sometime after September.

The move stems from a settlement the NYSE reached with the Securities and Exchange Commission in 1999 following charges it did not properly supervise the trading of its independent floor brokers. Investigations by the SEC and the U.S. Justice Department found as many as 64 $2 brokers were allegedly involved in front-running schemes between 1993 and 1998.

The Big Board offered up a two-phase approach to order electronification. In Phase I, floor brokers must enter all orders into a system before representing them in the crowd.' In Phase II, upstairs traders must enter orders electronically as soon as they receive them. That way, all orders in the future will be delivered to the floor electronically. The aim is to create a time-stamped audit trail from the moment an order is received until its execution.

Phase II is on the back burner, but may kick in later this year. Phase I got under way last December after the SEC approved changes to NYSE Rule 123. In 1998, the Big Board had proposed amending Rule 123 (which deals with floor brokers' record-keeping obligations), after both the Justice Department and the SEC filed charges in the front-running schemes.

OMS suppliers say both the floor market and the upstairs market offer potential. "We see the rest of the year as a nice sign-up period for us," said Andy Wilson, vice president of sales and marketing for NYFIX. "But you'll really see our value-added when Phase II goes into effect. Our [OMS for the block desk] takes order flow in electronically from the buyside. Traders can seamlessly route through us to the floor. Nobody else can do that."

NYFIX has long been the dominant OMS supplier in both markets. On the floor, it claims a 70 percent market share of all booths using OMSs. Top customers include Lehman Brothers and UBS Warburg. Its only competition at 11 Wall Street has been the proprietary systems of a handful of large brokers and the NYSE's own OMS, the Broker Booth Support System (BBSS).

Although free to members, the BBSS has long been criticized as lacking in features and difficult to use. Most of the largest house brokers do not use it.

Big change is afoot.

The Big Board is beefing up the functionality of the BBSS in order to reach a wider audience. New features include the automatic aggregation of all orders for a particular stock; the allocation of reports against orders; and multiple order entry.