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March 1, 2003

Arca, Big Board Executions Criticized

By Gregory Bresiger

The New York Stock Exchange and the Archipelago execution systems are usually seen as adversaries in market structure debates and disputes.

But now both market centers - one from the old school, the other from the new - are on the same side in a new stormy battle.

The Big Board, one critic charges, isn't living up to its obligations to ensure that "transactions are executed properly and fairly." And Archipelago's slow trading algorithm is costing Electronic Global Securities in San Francisco missed opportunities, causing it to eat trading losses.

That's what an official of Electronic Global Securities argued in a complaint filed with regulators and exchange officials.

"These slow execution times could bring down a firm. And even if these are small losses, it still is bothersome," Joseph Kennebeck, head of trading for Electronic Global Securities, told Traders Magazine.

Kennebeck's most recent problems with Archipelago began when his firm sent two customer orders to ARCA on Feb. 3. Both orders were for 500 shares. They were long sales to be sold at the market. ARCA ended up re-routing the orders to the Big Board.

Cancel Request

"After 55 seconds of inactivity on the order, the ARCA trading algorithm automatically sends a cancel request to the NYSE. Within one second after that, ARCA gets out of the order and resubmits it to the best market on the stock. In this case the best market was still the NYSE, so the orders were routed again to the NYSE," Kennebeck wrote in a letter to the NYSE that was also sent to the Securities and Exchange Commission.

Kennebeck asserted that he made the same complaint in January. At that time, NYSE officials, in response, wrote that their Market Surveillance group expects "a specialist will make every reasonable effort to keep a fair and orderly market, regardless of the trend." NYSE officials added that, while the specialist can't be expected to prevent rising or declining stock prices, the NYSE does "expect him/her to participate against the trend, adding depth and continuity to the market."

As for this latest complaint, Big Board officials declined comment. Archipelago officials were not available for comment for this story.

But Kennebeck said the specialist did post a valid bid at the time the orders in question were at the NYSE. Even though the attempt was made to add continuity to the market, the effort by the specialist was "a complete and total failure."

Kennebeck contends that the specialist was an "impediment" to the trade and "actually prevented trades from occurring."

Kennebeck added that, so far, he has only "received perfunctory assurances" that the complaints will be investigated.

Enough Time

Kennebeck concluded his letter by saying that "in this day and age of electronic trading, 55 seconds should be more than enough for a market order to be filled. And at sizes of 500 shares or less, these specialists should not even have to be involved.

Also, why weren't either of these orders executed automatically for at least the posted bid size?" Kennebeck asked.

The Securities and Exchange Commission, which received a copy of the complaint, declined comment.