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The Bell Tolls for the Big Board

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Seijas proudly shows me the Big Board's biggest concession so far to electronic communication -- a computerized system called Super-dot (for "designated order turnaround") that can send orders of up to 99,999 shares directly to the specialist's computerized "book" of orders, without passing through the hands of a floor broker. Completed in the eighties, Super-dot took nearly a decade to fully install, in part because members fought it fiercely; it wiped out a whole echelon of brokers who made their living handling mainly small orders. Today, 90 percent of the NYSE's orders come in through dot, accounting for 45 percent of the shares that trade. "The independent brokers who make their living on order overflow still have very mixed feelings about it," Seijas says.

Critics of the exchange, though, note that dot just brings the orders to the floor without actually executing them. Seijas must open dot orders up to any floor broker who wants to buy or sell to them, but orders are visible only at his post, not off the floor. As a result, dot orders become "free options" to the floor crowd -- they have an instant information advantage over the person who sent the order in. For that reason, few send large trades over dot, and critics say that even when it has modernized, the exchange has taken care of its own.

At noon, Seijas retires to smoke in a slightly run-down barroom attached to the exchange dining club -- wood-paneled walls, leather-upholstered chairs, and yellow paint peeling around an electrical outlet in the wall. Specialists, he explains, are actually involved in trades that account for less than 15 percent of the volume on the floor; brokers meet each other directly the rest of the time. But it is the presence of the specialist to provide liquidity -- that is, make sure it is never too hard to buy or sell any stock -- that is the hallmark of the NYSE. "The New York Stock Exchange is the Mercedes-Benz of stock trading," says Joel Surnamer, Pfizer's specialist, who joins Seijas in a smoke. Although its fees are high, the NYSE saves investors less-obvious costs, like volatile prices. The big brokerage companies push the new trading systems so they can make money matching orders themselves, Surnamer says, but they still want to use the NYSE's fair prices and fall back on its liquidity in a pinch, essentially hitching a free ride on the NYSE's system.

Investors and traders off the floor, however, often grouse that the human element of the NYSE is maddeningly fallible. None complains as vociferously as Harold Bradley. Bradley sits halfway across the country from the canyons of Wall Street, in Kansas City, managing a portfolio for the mammoth American Century Investments. "The NYSE makes it so needlessly complicated just to put the peanut butter on the bread!" he tells me over the phone. "Everyone in the whole bucket brigade that handles my order takes a cut, and each of them has a chance to tell five other people!" Bradley and some other fund managers have petitioned the NYSE for years to show the specialists' order books to the public and automate more of the process. "Brokers are just toll-takers. They should get shares for their seats and go sit on the beach," Bradley says.

One reason Bradley may finally get his wish is right down the street. Island, one of the two biggest alternative trading systems and the first one to apply to become a self-regulating exchange, is based just steps from the Big Board, at 50 Broad Street. Island alone now accounts for about 12 percent of the trades each day on the NASDAQ.

Matthew Andresen, Island's 29-year-old president, works out of a dingy office on the fifth floor with three dusty chairs and a stained carpet in its narrow lobby. At 5:15 P.M., when Island's online market closes, he jumps up to show me where it all happens -- the stock exchange of the future. He leads me down an elevator to the lobby and through the back stairs to the building's basement. "Do you have the gun?" he asks the security guard, a former New York City cop, who dutifully empties an old revolver for Andresen to play with. "I was stunned when I learned he was packing," Andresen says, handing it back.

Walking and talking at a frantic pace, Andresen leads me past a small pantry of computers through a locked door into an off-white air-conditioned room full of rows of PCs on shelves. There it is in the back of the room: Island's candidate to replace the Big Board's 1,366 floor brokers is a real black box, about the size of a file cabinet. It was purchased off the shelf from Dell Computers for $5,000. (The software inside is proprietary.) Inside, nearly a million orders meet each day to execute 380,000 trades accounting for about 120 million shares. Island feeds the net results into the NASDAQ's national system. (Today, Island is open from 8 a.m. to 8 p.m., and it plans soon to stay open from midnight to 10 p.m.)

Andresen wears a scruffy goatee and shaves his balding head. He has a broad athletic frame developed as a member of the U.S. national fencing team. After graduating from Duke, he came to New York to train for the Olympics at the New York Athletic Club. All the other fencers worked on Wall Street, so he became interested in doing the same. "Disgusted" by his failure to make the Olympic team, he found a job on the commodities-trading desk at Lehman Brothers, where he fetched coffee and sometimes stapled. He quit in frustration to become a day trader at an office run by Datek Online. "I did all right -- I got this job, didn't I?" he says. "I didn't like it as much as I thought I would. Day trading was pretty brutal to me, but I got a firsthand look at the market." He began talking about how the markets might be more efficient with Josh Levine, who was then a young software consultant to Datek. At the beginning of 1998, Levine hired Andresen to manage his start-up electronic trading firm, Island. Datek, which has had its share of run-ins with securities regulators, now owns 73 percent of the company.

The possibility of wholly electronic stock exchanges arrived in the U.S. on January 20, 1997 -- a day Andresen calls "the most fundamental sea change in the history of the buying and selling of stocks." That day, securities laws drafted after a price-fixing scandal on the NASDAQ market created the opportunity for new wholly electronic systems to trade stocks and automatically plug into the NASDAQ network. The NYSE's rules restrict Island from trading NYSE stocks, so Island applied to become a self-regulating exchange on June 28, and if it succeeds, it will be able to trade Big Board stocks too.

"You are talking to the A-1, true believer," Andresen says. "It is not just that we don't have any people and so we are much cheaper -- it's better. When there were 24 guys under the buttonwood tree down the street, they had to do it face-to-face because they didn't have the technology. It was, 'Bob, you got any Confederate slave holdings?' But today it is still people talking to people, and that is inherently inefficient. Maybe Bob had a fight with Steve over the bar tab the night before, maybe Bill went to school with Jim, maybe Estelle is too short and no one can hear her -- whatever. It is inefficient; you are making decisions based on something other than the value of the order and when it came in."


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