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.

Wall Street needs to take more steps to improve its business continuity planning. That was what a Congressional investigating agency recently reported. It has examined the emergency planning of some 15 organizations, including several exchanges.

"Our review indicated that most of the 15 organizations faced greater risk of operations disruptions because their business continuity plans did not adequately address how they would recover if large portions of their critical staff were incapacitated," according to Davi M. D'Agostino, the GAO's director of financial markets and community investment.

Market fragmentation has resulted in a "regulatory crisis," Nasdaq officials charge in a white paper and letter sent to the Securities and Exchange Commission.

It has been caused, in part, because Nasdaq trades are increasingly printed in other venues such as the Cincinnati Stock Exchange. [See story opposite.]

This means the task of overseeing trading, for groups such as Nasdaq and the Intermarket Surveillance Group, has become more expensive and difficult, according to the white paper.

Insider Trading

"Given that some of the most prevalent types of trading abuses, such as marking the close, manipulation and insider trading, are often conducted across more than one market, it is imperative that the regulator or regulators responsible for preventing such activity have a means for gathering and integrating such real-time regulatory information from multiple markets," according to the white paper.

The problem, Nasdaq claimed, is not going away. Trades outside the Nasdaq system were about two percent in January 2002. By November of last year, that number had risen to 17 percent. This is causing price concerns as Nasdaq and other exchanges find the costs of regulation rising at a precipitous rate.

"There is currently a regulatory crisis facing the markets that trade Nasdaq securities," Nasdaq officials wrote.

Fragmentation

The officials note that fragmentation does enhance competition. However, that is creating pressure to lower regulatory and other costs. Indeed, "fragmentation is making it more difficult and costly for SROs to meet their regulatory responsibilities…Nasdaq believes that the current system for overseeing trading in Nasdaq securities, although adequate when Nasdaq was the sole center of liquidity, is now left with holes that grow larger by the day," the officials wrote.

Nasdaq also wants the National Association of Securities Dealers, from which it is separating, to have expanded regulatory authority over market centers outside of Nasdaq.

Without changes in the SRO and intermarket surveillance programs and without an expansion in the regulatory jurisdiction of the NASD, Nasdaq officials warn that the regulatory system will fail. Market manipulation and other violations will be more likely to occur. They note that other regional exchanges will follow the lead of the Cincinnati and start to print their own Nasdaq trades.

The Securities and Exchange Commission declined comment.

Nasdaq's complaints in a recent white paper about holes in the regulatory system are based on "material misstatements, mischaracterizations and suppositions." Nasdaq is attempting to "cloak its anti-competitive desires behind the claims that the CSE [Cincinnati Stock Exchange] and other markets lack sufficient rules…CSE is greatly troubled by these accusations, which the Nasdaq knows to be false."

That's what Jeffrey Brown, senior vice president and general counsel of the Cincinnati Stock Exchange, wrote in a blistering reply to the Nasdaq white paper, which was sent to the Securities and Exchange Commission. Brown contended that Nasdaq's paper is inconsistent.

"Nasdaq," Brown continued, "does not appear to be arguing that the same surveillance programs are inadequate as applied toward NYSE-listed securities, nor does Nasdaq appear to be arguing that NYSE assume regulatory jurisdiction over Nasdaq members trading NYSE stocks." Nasdaq, Brown contends, is less concerned about regulatory holes than its own competitive position and costs.

"Its motivation in proposing this change is to effect a bailout of its contract for regulation with NASD, a contract that failed to anticipate real competition in the trading of Nasdaq securities," according to Brown.

Cincinnati officials contend that, if the SEC accepts the proposals of the Nasdaq white paper, the system of self-regulation will end because Nasdaq will be able to police its competitors' marketplaces.

Payment for exchange sponsored option order flow should be eliminated, but the Securities and Exchange Commission must be clear in how it wants to do that.

There are times when internalization carried out by members can be in the best interests of the clients and the SEC should enact rules that will clarify these situations.

That's what Philadelphia Stock Exchange (PHLX) officials are telling the regulators.

Broker dealers' best execution guidelines aren't always clear for the exchange's members under the current rules, wrote Meyer Sandy' Frucher, chairman of the PHLX.

"Rules that promote internalization, facilitation, crossing and similar practices by exchange members clearly create opportunities for such members to benefit from order flow received from their customers (or purchased from others) through increased trading opportunities and commission revenues," Frucher wrote in a letter to the SEC.

Order Routing

"Whether a firm is likely to wantonly trade," Frucher continued, "against internal order flow to the detriment of customers, by not aggressively seeking the best price, depends primarily upon the integrity of the management of the order routing firm and, secondarily, upon the various safeguards built into the system."

Frucher noted that some of these safeguards are required by the rules of the exchanges.

The SEC started this debate back in January when it sent a letter to the heads of the five options exchanges warning that payment for order flow "encourages firms to consider their own economic interests over those of their customers."

The SEC says it is studying the issue.

*The Cincinnati Stock Exchange appointed Geoffrey Gradler as director of government affairs and Bonnie Greenberg as director of corporate communications. Gradler will represent the exchange on regulatory issues in Washington where he was previously a policy analyst for Tom DeLay, the recently elected House Majority Leader. A former journalist, Greenberg once headed the public relations department for the Chicago Board Options Exchange.

*Adams, Harkness & Hill is building an institutional listed market making desk in Boston. It named Kevin J. Ronayne managing director and head of the new business. Before he joined, Ronayne was head of listed trading at Investec in New York. He also worked in San Francisco for Robertson Stephens and Montgomery Securities.

*Credit Suisse First Boston made changes in the ranks of the institutional securities unit. Mike Clark, formerly global head of equity trading, and Jim Kreitman, the co-head of European equities, are the new co-heads of the equity division. The division was previously headed by Brady Dougan, who became co-president of Credit Suisse last year. Neil Moskowitz, chief operating officer of the equities division, was named COO of the unit. The firm is also forming an institutional securities operating committee.

*Reuters reorganized the management ranks. Devin Wenig, former president of the investment banking and brokerage unit (IBB), will oversee IBB, Treasury, asset management, corporates and media. Isaak Karaev will fill Wenig's role at IBB. Graham Albutt will be responsible for the Fast Forward project launched to revive Reuters' sluggish fortunes. Philip Green, COO, will take charge of development, operations and data.

*RBC Dain Rauscher promoted a top executive at Hill Thompson Magid, a dealer that is expanding in Nasdaq, OTC and Bulletin Board stock trading. Nicholas Ponzio (inset) was elevated from president to CEO, a post previously held by Anthony Broy who will remain as chairman.

*Tom Mulroe moved to TAG as senior vice president of operations. He comes from TD Waterhouse where he spent 13 years in various management positions, most recently as first vice president of trade quality management.

*Systems vendor OM hired two pros in its Americas division. Curt Brill joined as senior vice president, sales and marketing, covering financial markets. Wayne Arden joined as vice president of sales, exchange and clearing services. Brill was most recently with Reuters where he was in charge of transactions products management. Arden previously worked for IBM in a variety of sales, marketing and business development positions.

*Jamie Selway (inset), chief economist of Archipelago, left the company with four colleagues to start an institutional agency brokerage, White Cap Trading in New York. The other Arca pros are Bill D'Arbanville, Tim Love, Jamie Petraglia, and Quito Zuba.

*TowerGroup expanded its Securities and Investments practice, adding three executives. Ernest Brito, a managing director, will serve as a senior advisor, consultant and relationship manager for major clients. Brito's career included management positions at various firms, such as Deloitte Consulting. Stephanie Evanick as a manager will focus on developing and managing consulting engagements. Evanick was previously a strategy and business architecture executive at Accenture. Miranda Mizen as a senior analyst will be supported by her extensive experience in the global equity markets. She was formerly first vice president at Instinet.

Nasdaq, in a bid to wrest market share from ECNs, changed its rules to allow order entry firms to post certain limit orders on SuperMontage.

Non-market making NASD members can now post non-marketable limit orders, or those whose prices are inferior to the market's best, directly onto Nasdaq's new trading system. Previously, only dealers could do so.

Order entry firms could only post marketable limit orders, or those whose prices create or match the market's best prices, in SuperMontage.

Agency brokers that wished to post so-called "resting" orders on SuperMontage did so indirectly via ECNs.

However, one of the largest ECNs, Instinet, does not represent its quotes in SuperMontage. A second, Archipelago, is moving its quoting activity off Nasdaq to its new exchange, ArcaEx.

Nasdaq says its decision means that traders using defector-ECNs will still be able to post on SuperMontage. "Over the past few months, more and more orders, generated by non market-making broker dealers, are displayed in unlinked markets," said Rick Ketchum, Nasdaq president. "We believe it is critical to bring this liquidity back to SuperMontage."

At least one agency broker is pleased by Nasdaq's move. "If most of the liquidity in a particular security is on SuperMontage," said Randy Abernethy, president of UNX, "then giving people access to post there gives them an advantage."

Abernethy notes that a security may trade more shares in one market than another.

"Nasdaq is moving to compete toe-to-toe with the ECNs," he added. "They're taking down the boundaries that prevent people from adding liquidity."

Floor traders on the American Stock Exchange might soon be assessed a fee to finance payment for order flow.

This would come under a plan that members privately said the Amex is considering to lure more options orders. However, a spokeswoman for the exchange said action had not been taken.

"We have not done anything on any fee plan for order flow. Everything is status quo," she told Traders Magazine.

Traders privately said that the plan under review by the Amex would call for the exchange to collect 40 cents per option contract for each of the 100 most actively-traded option classes. The plan would also call for collecting $1 per contract for the popular options on the QQQ, or the Nasdaq 100 Tracking Stock.

The plan is controversial because regulators have been pressing exchanges to stop the practice of payment for order flow.

The dream of a pan-European trading platform appears to have been achieved, but will it turn out to be a nightmare?

The SWX Swiss Exchange's takeover of Virt-x – along with its bold announcement that it is going to promote the Virt-x European platform at least for another year – has sparked a debate.

Is SWX's move premature or is its step coming at just the right time to take business away from established exchanges? Even some of the advocates of the pan-European exchange agree that timing could be a problem.

Lee Hodgkinson, director of operations at Virt-x, said it could have been different had Virt-x launched three years earlier, rather than in the middle of a market downturn. But Hodgkinson still thinks the pan-European idea is on target. That's despite Virt-x not having reached its early goal of 10 percent in European blue-chip trading volume. Hodgkinson contends that the migration of a Swiss national market is a signal event. It had never previously been attempted.

Skeptics claim that the acquisition proves that the Virt-x model is in trouble.

Alasdair Haynes, CEO of ITG Europe, which operates the POSIT crossing network in Europe, said that a new Virt-x entity won't survive today unless value is added. He said drawing liquidity from a national exchange is difficult.

SWX took control of some 90 percent of Virt-x recently, which was originally launched as a joint venture between Tradepoint and the Swiss exchange. Shareholders, which include a consortium of leading investment banks and securities holders, agreed to an offer of 12.5 pence per share from the Swiss exchange. The latter is delisting Virt-x shares from the London Alternative Investment Market and will acquire the outstanding shares.

BrokerageAmerica will now impose liquidity fees on some Nasdaq orders submitted by its broker dealers. The fee will not be applied to Pink Sheets and Bulletin Board business. Broker dealers will not be charged for any not held orders of 2,500 shares or greater. Every held order, under the new schedule, and not held order of 2,500 or less, will be charged a penny per share.

BrokerageAmerica officials said they don't expect any substantial clients to be driven away by the liqudity fee.

"This move is in response to the market climate as well as the development of ECNs and decimalization," said Drew Sycoff, chief executive of BrokerageAmerica. "We're not afraid to do this because we believe our clients will understand."

He said other institutional players have been waiting for someone to impose this kind of fee and predicted that others would follow his firm's move.