IT Plays Critical Role In NYSE’s Global Market Gambit

If the plan works, NYSE could become a global, round-the-clock marketplace for stocks, bonds, options, and derivatives. If not, the nation’s pre-eminent stock exchange could surrender market share to domestic and global competitors.

By Aaron Ricadela, Information Week
26 June 2006
The New York Stock Exchange has had little first-hand experience with big mergers in its 214-year history. Now, the Wall Street icon is coming up to speed quickly, having done two major acquisitions in the past year.

In January, NYSE Group, the exchange’s parent company, closed a $9 billion acquisition of Archipelago Holdings, whose computer systems for electronic stock trading are newer and more sophisticated than its own. This month, NYSE Group agreed to acquire Euronext NV, which operates stock exchanges in Paris, Brussels, Amsterdam, and Lisbon, and a futures exchange in London, for $10.2 billion. If approved, the deal would create a three-way combination with $100 billion in daily trading and $27 trillion worth of listed companies–and potentially a state-of-the-art electronic network. NYSE’s buying spree may not stop there: CEO John Thain has said Asia could be next.

If the plan works, NYSE could become a global, round-the-clock marketplace for stocks, bonds, options, and derivatives. If not, the nation’s pre-eminent stock exchange could surrender market share to domestic and global competitors as it tries to merge the operations of three companies after essentially going it alone since its founding in 1792.

NYSE is under pressure to cut costs as competition from Nasdaq and international rivals such as the London Stock Exchange and Deutsche Boerse has forced down the price of trading. It’s trying to move more U.S. trading volume from its open-outcry floor to Archipelago’s Arca network. NYSE has said buying Euronext could result in $375 million in cost savings–and $250 million to $300 million of that could come from rationalizing IT, according to Bill Cline, managing director of global capital markets at consulting company Accenture.

How many balls can Rubinow juggle with system migration?
Photo by Chris Lake

NYSE Group appointed a new chief technology officer last month, elevating Steve Rubinow, who had been CTO at Archipelago, to head of IT for the entire company. For now, the NYSE’s computer systems and Arca continue to operate in parallel. “It’s too early to have integrated them tightly,” Rubinow says.

Arca routes trade orders to NYSE, but that one-way capability was in place before NYSE and Archipelago came together. The next step is bidirectional routing of trade orders, something NYSE is working on now.

There’s “substantial overlap” in the technology portfolios of NYSE and Arca, Rubinow says. Together, they have a half-dozen database vendors and nearly as many hardware vendors. So expect consolidation. As part of the streamlining effort, NYSE will steer brokerage firms and other institutional customers toward its own SFTI network as a way of accessing both the NYSE and Arca exchanges, since many use multiple carriers to do that today. Fewer connection points means less adminstrative work for NYSE.

NYSE is undertaking a transition from decades-old computer systems from Tandem Computers and Stratus Technologies to low-cost servers running Linux, while maintaining the ultrahigh reliability and fast execution needed to run the exchange.

At the same time, NYSE is rolling out a new “hybrid” computer trading system that can match buyers’ and sellers’ prices for electronic orders over the NYSE’s Direct+ system, then bring in a floor specialist to make a market for a security if there isn’t a match.

Rubinow doesn’t consider it a disadvantage that NYSE has little M&A experience. “A lot of this is common sense,” he says. “Our people know where the biggest opportunities for improvement are.”

Last System Standing

For the time being, NYSE plans to maintain two computerized trading systems, Arca and the hybrid, “and see which wins,” says Larry Tabb, founder and CEO of the Tabb Group, analysts for technology vendors serving financial markets.

NYSE Group completed a first phase of the hybrid rollout in April with a system for stock brokers; systems due this year for floor specialists and listed companies are expected to increase the system’s electronic order size tenfold and reduce lag times of as much as half a minute between bids and matched prices. New trading rules require exchanges to execute electronic trades in fractions of a second.

The Arca network provides instantaneous matching of buyers’ and sellers’ prices but now has to support the large and complex NYSE. During January and February, about 2.5 billion orders passed through Arca each month. “It was built for a much smaller market,” says Fred Pennino, an associate partner in IBM’s global services unit focused on stock exchanges. “That’s one of the challenges Steve is going to face.”

Another is the planned Linux migration. NYSE has dozens of applications that support floor trading, market-making specialists, stock brokers, and resale of market data. According to Pennino, the NYSE maintains about nine IT environments beneath it all. “You have a hodgepodge of different operating systems and platforms,” Pennino says. “One of the first challenges they have is to bring that down to two or three or four.”

A wild card is the future of the Securities Industry Automation Corp., the IT subsidiary of the NYSE and American Stock Exchange that’s served the exchanges for 34 years. In January, SIAC named Marianne Brown, a former brokerage executive from Automatic Data Processing with expertise in high-speed, large-scale transaction processing, as CEO, reporting to Thain. In addition to trading systems, SIAC runs clearinghouse systems that settle the accounting when trades are executed.

Whatever decisions the NYSE makes, it could take a few years before it’s clear whether they’ve succeeded. “I’d love for everything to be plug and play, but that’s too much to hope for in a short period of time,” Rubinow says.

According to analyst Tabb, the exchange won’t try to write one set of code that runs all its exchanges. But it could be feasible to maintain multiple applications that run in one data center on top of Linux, share information, and support the Arca, NYSE, and Euronext networks.

“The chance of them being able to do this in the near term in doubtful,” Tabb says. “They can’t make any radical changes until they see whether the hybrid works or not. … There’s at least five to 10 years of work to change the platform.”

But Rubinow’s already at work. He expects the IT assessment to end, and progress to be made, over the next six to 18 months.