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September 30, 2001

Thinking the Unthinkable Trading Firms Look for Backup Sites

By Peter Chapman

New York's trading commu nity is scrambling to change its disaster recovery plans.

Most brokerages were apparently unprepared for the magnitude of the September 11 calamity at the World Trade Center. Their back-up plans were predicated on localized damage that was easily reparable within a week. Skeleton crews would simply maintain positions in small back-up facilities or other offices until it was safe to return.

None expected an entire section of Manhattan to be declared off limits for weeks, or even months. Very few firms maintain fully redundant sites outside Manhattan which allow them to trade at 100 percent of capacity. And, of course, none expected the tragic loss of life.

The disarray has hit not only the unfortunate tenants of the World Trade Center, but those in nearby buildings. Merrill Lynch, CIBC World Markets, Lehman Brothers and Fidelity Capital Markets all maintained large trading floors in the World Financial Center. Gruntal & Co. and National Securities were located at One Liberty Street. All had to evacuate buildings and resume trading elsewhere.

"Nobody had a disaster recovery plan for the buildings being out of commission for this long," said Gerard Nizich, head of Nasdaq trading at Gruntal. The firm is conducting its Nasdaq trading at the offices of M.H. Meyerson in Jersey City. Listed trading is conducted at space provided by SunGard Trading Systems in Jersey City.

None of the firms are trading at capacity. Lehman Brothers has about 70 percent of its trading staff working out of a building in Jersey City and may not be able to return to the World Financial Center for up to a year. Lehman had to spend five days readying its new site for the restart of trading on Monday, Sept. 17. Telephone work still needs to be done.

Merrill Lynch's traders have doubled up with those at its wholesaler subsidiary, Herzog Heine Geduld. Fidelity has split its trading between Boston and Carlstadt, N.J.

CIBC World Markets is making markets in the Jersey City offices of its BRASS order management system vendor, SunGard Trading Systems. With 30 seats in its Jersey City offices, CIBC is making markets in 400 of the 600 stocks it normally trades. Its disaster recovery plan was limited to a short stay at the bank's midtown office where six or seven traders maintained positions, according to John Giovannello, CIBC's head of Nasdaq trading.

Despite the inconvenience, CIBC is not leaning towards establishing a fully-redundant trading site. "It's very expensive to build and maintain a room and keep updating the technology every couple of years," Giovannello said.

That's certainly true. Bernard L. Madoff Investment Securities built one across from LaGuardia Airport in the New York borough of Queens at a cost of $3 million after the 1993 bombing of the World Trade Center. It costs a few million dollars per year to maintain it, according to Bernard Madoff, the firm's president. Traders at Madoff spend one week of every month trading at the site so it is always functional.

Charles Schwab Capital Markets also maintains a site in Piscataway, N.J., says a spokesperson. It is staffed year-round as well.

But such sites are rare. "Firms in the financial services industry spend more on recovering their IT infrastructure than they do on business operations," said Ken Smith, president of disaster recovery outfit SunGard Planning Solutions. "Far, far less than 50 percent of the trading stations had a defined recovery location."

Experts say recovery of a trading operation involves a new site, complete with workstations; computer file back-up; and voice and data connectivity to customers and trading partners.

Connectivity was a big headache in the current disaster after a Verizon switching station that reportedly carried 40 percent of Wall Street's lines was destroyed.

"I certainly hope and believe this is a one-time event," said Matt Johnson, head of U.S. cash trading at Lehman. "But every firm on Wall Street is now going to think more seriously about their disaster recovery plans."