By Lou Pastina, Global Markets Advisory Group Partner, and Bob Walley, recently retired Deloitte Principal and GMAG Partner, with contributions by GMAG Partners Jim Buckley and Dan Labovitz
When I joined the NYSE in 1983 our trading hours were 10 am to 4 pm Monday through Friday. There were still people around who remembered the Exchange closing on Wednesdays and workers coming in Saturdays to compare paper trades because the volume was so overwhelming. Those days we traded under 100 million shares a day and had over 90% market share. It was the early days of ATMs, and I remembered thinking at the time “why can’t I put an order in to buy or sell stock right here in the ATM?”.
The infrastructure of the market at the time included a regulatory framework that required a broker dealer to be a member of an Exchange and be bound by the rules of the Exchange which included only trading with its members. Trading floors were populated by human beings negotiating trades; back offices were populated by armies trying to figure out what the traders had written down on small slips of paper. Technology was confined to electronically distributing quotes and trades to tickers around the world. Some firms harnessed the power of sending orders electronically to Exchanges where they would print out and be represented orally. Batch processing was the main way things got moved along the factory line. Paper was everywhere.
Once the paper order was taken to the floor and executed, the orders were sent to DTCC for clearing. In 1983 National Association of Securities Dealers and the exchanges adopted the New York Stock Exchange Rule 387, which mandated the use of automated confirmation and book-entry settlement for Cash on Delivery transactions in equity securities between brokers, dealers and their institutional clients.
Recently, with significant help from the government, new volume records were established in the listed equity markets. Over 26 billion shares changed hands in one day. About 55 percent was done through Exchanges, the balance through Alternative Trading Systems, Wholesale Broker Dealers and other associated players in the market. All the activity was reported electronically in real time to the clearinghouse and to the consolidated tape associations for distribution to the world. Trades were settled on T+1 after a move from T+2 in 2024; Europe continues to settle in T+2. Literally unthinkable when I started on Wall Street.
Today, we order most of what we want through Amazon, with a clear expectation that our order will be delivered to our doorstep tomorrow, and sometimes even the same day. I don’t think we are alone in this respect. Doesn’t matter the time of day, we can order at any time with the same expectation. Is it any wonder that Amazon, along with perfecting the assembly line of ordering, fulfilling, and delivering, also operates the world’s largest cloud server systems? Old-world investors buy and hold, even in times of great distress, such as we are experiencing today. We were taught a long time ago, that a loss is only a loss if it is “locked-in”, and by that, I mean if the security is sold. Apparently, old-world investors may be in the minority because someone decided to sell 26 billion shares of stock last week, even in the face of steep losses. Amazingly the infrastructures of the Exchanges, Broker Dealers, Clearinghouse and Ticker Plants all held up to the task of processing that data. One can only assume that the Consolidated Audit Trail System (CAT) also held up (processing over 1T records). Interestingly enough, the CAT is powered by Amazon Web Services (AWS). I wondered how many people would have kept selling if the market didn’t actually close, if it continued to be open 24 X 7 just like Amazon? Would people continue to sell all weekend long as well?
There were times in the past when a “cooling off” period really helped the market think about what had just happened. A weekend gave people time to reassess the situation and to make rational decisions in terms of their portfolios and risk profiles. When trades cleared overnight, they provided enough liquidity for new trades and capital requirements to be met. One of the big projects at the NYSE in the early 1990’s was to look at off-hour trading, as it was called back then. As Exchange rules melted under regulatory pressure to modernize and pressure from competitive members, trading began to migrate offshore, big blocks paired by big brokers making big commissions found their way to London to be printed overnight. Repatriating that volume was the primary goal, assuaging members was a secondary one, and trying to slow the pace of technology may have been a tertiary one. But the pace of competition and technology cannot be slowed. The NYSE decided, with help from West Coast firms, that opening early at that time was not worth it. We launched some after-market trading vehicles, but that kept the wolves at the door for only so long. Soon, Alternative Trading Systems were ushered in by entrepreneurs spurred on by an anxious regulatory staff looking for change. They pushed the envelope and made everyone more competitive; they also opened early and allowed trading to continue later.
Robinhood helped democratize the stock market for everyday people. Enough horsepower is in the palm of the hand of today’s average person to get someone to the moon in 1969. So, it’s no wonder that people would want to have the same experience buying and selling stocks that they would ordering from Amazon. Back when the NYSE was an independent member owned firm it would build strategic plans. The list of our top competitors would include other Exchanges and competitive firms, but our CEO at the time would point out that the top competitor was not another market or a broker dealer, it was Microsoft. He knew that even then. Today I would say take your pick: Amazon; Google; Microsoft; Musk?
The broad ecosystem infrastructure is not yet ready for 24 x 7 trading. Yes, many of the Exchanges advocate they can be open for 22 or 24 hours a day, but that is not presently the case with the majority of the other market participants. The way the computers run, are updated, serviced, doesn’t allow for it. There are still way too many mainframe systems and applications that entrenched players still have investments in. In May 2024, the US moved (ahead of Europe) from a T+2 to T+1 settlement cycle. It was the consensus of the industry, due to technical and operational processes, that we were not ready to move to a T+0 settlement. Just because we can book a trade, doesn’t mean that the downstream systems, clearing houses, transfer agents and broker dealers can do their part. As was discussed in T+1 planning, there is significant value to end of the day netting reducing financial exposure, reducing capital requirements and the most important element, detection and prevention of fraudulent transactions. In a T+0 or real time settlement, once the money is lost in a fraudulent transaction it is gone and you’re not getting it back.
Look at the securities information processors (known within the industry as the “SIPs”) – they need to be open too. The clearinghouse as well. Some entreprenuers are working to launch 24 x 7 exchanges (the SEC recently approved the registration of an exchange seeking to implement that model), they are pushing the envelope again. The one thing that still needs to be solved, regardless of the number of hours trading, is strengthening the resilience of the market infrastructure. When there are exchange outages, front-end investor platforms go down, or issues occur at the clearing houses, the ecosystem is impacted.
Maybe it is all for naught, because look at the Crypto world. They trade on totally different platforms using different infrastructures, newer ones; why can’t equities trade like that? We are headed to a whole new world, when the direction of the market can change course with the utterance of a single phrase. Will our markets be able to handle the volume, the volatility, the ever-changing technology, and the demand by a populace that wants its product to be delivered immediately any time day or night? To paraphrase Bette Davis’ famous movie line: “fasten your seatbelts, it’s going to be a bumpy ride!”
