At the NYSE, the paper chase is over

By Maria Trombly | Securities Industry News | April/May 2002

Perhaps the New York Stock Exchange's most famous image is the paper blizzard that comes with a bell-closing rally and the littered exchange floor that results. But times are changing. Much of the paper that once passed from trader to runner, from trader to trader and from trader to customer has been replaced by technology -- hand-held devices used for trade information, emails, instant messages and customer communications.

This adds up to a lot of saved paper. According to Louis Pastina, the NYSE's VP of point-of-sale technology, the exchange saved 100 tons of paper last year, a 30-percent reduction over the previous year.

"You look around, you still see paper, but it's not nearly as much paper as there was just six months ago," said Kenneth Polcari, managing director of Polcari/Weicker, a division of at Garban Corporates Llc, an independent broker whose clients are mostly asset managers.

To be sure, paper is still used; not all traders use hand-held devices, and because some functions are not available at this point, traders can't use hand-helds all the time.

While it wouldn't be fair to say there is a competition between those that are wired and those that are paper-based, there are strong opinions, especially on the electronic side.

As Polcari said, it doesn't hurt for the paper-based brokers to see the electronic ones leaving an hour earlier every night because they don't have paperwork to catch up on. He also gets to leave at 4:30 instead of 5:30 or 6 p.m., because the hand-held devices are so much more efficient than paper slips, he said.

"While other brokers are writing the paper, we're here focusing on work," Polcari said.

Polcari has four traders on the floor and three clerks to manage the order flow. Without the hand-held devices, given the increased volume of business, he would have had to hire three additional people.

"The devices are faster, more efficient and there are no lost tickets," he said. "I can no longer do this the old-fashioned way."

By the end of 2000, according to Pastina, there were 15,000 messages a day being sent through the two most popular types of hand-held devices, up from 5,000 at the end of 1999. By the end of 2001, message traffic averaged over 50,000 a day. Share volume executed over the hand-helds increased as well, from 20 million at end of 2000 to 125 million at the end of 2001.

Today, out of some 800 brokers, about 600 are on the trading floor on any particular day, Pastina said. Of those, 240 to 250 use hand-held devices supplied by the NYSE. A similar number of traders-mostly those who work for the largest brokerage houses-use devices supplied by their trading firms. According to NYSE spokesman Christiaan Brakman, less than 10 percent of all NYSE trading volume-although 50 percent of dollar volume-comes in manually.

Now, not all traders have adopted the new devices. Some are close to retirement and are hesitant to switch, or they simply prefer to use time-tested methods. According to one paper-based floor broker, who is not near retirement age, the pressure to switch to hand-held devices-and there is some, he said-isn't enough to make him change the way he's always done business.

"I am just more comfortable this way," he said. "One thing about stock trading is there have always been a million different approaches, and a million ways to be a success or failure. I've done pretty good with a pen and pad and don't intend to stop now."

In addition to preference, some believe there are security risks because of the free nature of the transmission of information, said Damon Kovelsky, an analyst at Newton, Mass.-based Meridien Research. "It's probably more psychological than anything else. But the fear of information leakage is there," he said, "and we all know how protective people can be when it comes to dealing with what's on their personal books." Those fears will probably subside as the technology becomes more and more established.

The exchange plans to increase its spending on technology by 18 percent this year, according to Brakman, and has spent about $2 billion on technology over the past 10 years. The NYSE would not release the total annual spending amount, nor the amount spent on wireless technology.

Even as people have become more wired, a trend that began in the mid-nineties, the NYSE claims that it will not switch from a "peopled" trading floor to all-electronic trading. In fact, it may be hand-held technology that keeps the old trading floor viable, said Kovelsky. "But I don't know whether in the long term it will keep them from going purely electronic. The spreads are smaller, sure. But do they really need the specialists to ensure the smaller spreads?"

The NYSE started experimenting with hand-helds in 1994 and 1995 with some pilots and proof-of-concepts.

"We determined that this was a very feasible thing to do," Pastina said. "Once we did, we determined that we should build a production-level wireless network across the entire trading floor, which is actually five separate trading floors, separated by walls and a ramp."

NYSE hired GTE Government Systems in 1996, which partnered with NYSE's traditional software company, the Securities Industry Automation Corp.

"The reason we picked GTE was for their experience in the Gulf War and the telecommunications there," Pastina said. "We kind of equated the security measures there with those here. You couldn't have people eavesdropping on your orders."

In the end, NYSE opted for a three-level system of security for its new wireless network. First of all, there's the physical isolation of the network. The 50 antennas are pointed inside, Pastina said, so that signals don't spill outside the trading floor or onto New York's streets. And access to the trading floor itself is very tightly controlled by traditional security measures: ID cards, badges and security guards.

Secondly, the devices themselves are secure. Each device, whether provided by the NYSE or set up by the individual trading firm to conform to NYSE standards, must use the same antenna and communications protocols to access the network. At the end of each day, the devices are collected and secured.

Finally, there is password protection and encryption of the message traffic itself.

While NYSE contracted out for a custom-built wireless network, it decided against custom-building the hand-helds. The number of devices needed was too low to make it economically feasible, and the technology changed too quickly to make the investment worthwhile, Pastina said. Instead, the exchange opted for off-the-shelf technology, outfitted with antennas and communications software.

The first hand-held was a 286-based, tablet-style computer running Microsoft DOS, the old command-line user interface since replaced by Windows. The device, made by Epson, was called the EHT 30, and it displayed the information traders needed and let them use the touch-sensitive pad to enter trades. Though it weighed two pounds, it wasn't the weight that kept people from adopting it in droves.

"The issue was that it was slow, it was gray-scale-no color. It was low resolution, and it required battery changes," said Pastina.

Unless a trader wore a battery pack, which some did, the EHT 30 required two or three battery changes a day. The fact that it didn't have color made it hard for traders to distinguish buy orders from sell orders.

The next generation, the EHT 40, used a 386 processor and was slightly faster. But it was still gray-scale, and because its screen was low-resolution and small, traders had to flip through multiple screens to get what they needed, a slow and annoying process.

The first major advance came in 1998, when NYSE introduced a Windows 95 device, the Mitsubishi Amity VP. It was three to four times faster, in color, and had a larger screen so users didn't have to flip pages.

On the down side, the Amity was almost twice as heavy, about 3.5 pounds. Part of that was due to the larger batteries required by a faster processor and the color monitor. And it still required the same number of battery changes a day. But by that time, traders were becoming more familiar with technology and they found it easier to learn how to use the hand-helds. Traders believed the hand-helds would allow them both to do their jobs more efficiently and to provide better service to customers.

"We immediately saw an increase in usage," Pastina said.

At the end of 1999, Casio came out with the Fiva, a tablet-style hand-held that addressed more of the problems with the earlier machine. Once the NYSE put it into use at the beginning of 2000, usage jumped again, Pastina said. It was followed by a smaller Casio product, the Windows CE-based Cassiopeia, that was smaller, lighter and didn't require as many battery changes but also had less functionality. Traders could send messages and get market data but couldn't do orders and reports.

Not surprisingly, this year will bring another attempt by the NYSE to make the hand-helds smaller, faster and more user-friendly. In March or April, NYSE will introduce Compaq's iPaq, a Palm Pilot-like device with the size of the small Cassiopeia and all the functionality of the full-sized Fiva.

Ironically, the iPaq has a screen about the same size as that of the very first device, Pastina said. But it's faster, so users no longer mind having to switch screens.

The traders-many of whom use Palm Pilots or similar devices outside the floor of the exchange-are also more familiar with hand-held technology, he said.

"The first set of users was afraid if they hit the wrong button, something bad would happen," Pastina said. "We don't have that community of users anymore."

The iPaq will replace the smaller Cassiopeia completely, he said, and the Fiva will be phased out by year-end.

Robert McCooey Jr., president and CEO of The Griswold Co., plans to switch to the iPaq when it comes out.

"I've been a guinea pig on all the incarnations," he said. "The connectivity to our customer is key to our business right now."

In fact, when McCooey goes out to see potential customers, the fact that he's connected is a major competitive advantage, he said. For example, when he communicates with customers from the trading floor, he doesn't have to waste his time with bookkeeping matters.

"Instead of talking to customers about minutia, I can talk about bigger issues, especially in an environment where decimals have obscured the true liquidity of the market," he said.

In addition, he said, decimalization has caused order flow to migrate from specialists' books to hand-helds because customers are wary that specialists will step ahead of their orders. Also, his firm is now doing 11.5 million shares a day-a volume, without the devices, that would necessitate the hiring of eight more people, he said.

In addition to sending and receiving orders, Pastina said, the hand-held devices are also able to send reports back to trading desks and customers, to e-mail handwritten messages and to connect to dedicated networks. The messages move wirelessly between the hand-helds and the trading floor antennas, then switch to high-speed ground connections as they move to the Internet.

The NYSE has connections to a number of networks, Pastina added. In addition to suppliers like Radianz, Savvis, SunGard and Brass, individual brokerages like Merrill Lynch also have dedicated connections. Altogether, there are about 10 major network connections and hundreds of individual connections, he said. (photo of Kenneth Polcari)