The world marveled at how quickly and thoroughly the U.S. equity markets got back to business after the September 11, 2001, terrorist attacks. When they reopened the following Monday, September 17, the streets of lower Manhattan remained barricaded and debris-clogged, and the city’s citizens were dazed with grief and fear. The opening ceremony at the New York Stock Exchange featured plenty of well-deserved praise from political leaders, and not a few self-congratulatory plaudits from exchange executives.
But as it turned out, the Big Board’s wasn’t the most striking of the market-recovery stories. More remarkable was that of the American Stock Exchange, which sits just a few hundred feet from the World Trade Center site. Even before the second hijacked airplane slammed into the South Tower -- roughly 15 minutes after the first one hit -- the Amex had to shut down its air-conditioning system as debris and smoke enveloped its headquarters. Though the trading floor remained intact, windows had been blown out on seven floors; the electricity, water and steam were out.
Because the Amex couldn’t go back to its Trinity Place home until October 1, it reopened at the New York Stock Exchange. The move was possible because the two exchanges share the same technology infrastructure, managed by a company they jointly own, the Securities Industry Automation Corp.
The restoration of Amex operations stands out as a case study in technological ingenuity and on-the-fly reengineering. SIAC reprogrammed its messaging system so that Amex orders ended up in the NYSE’s exchange-traded-funds area, known as the Blue Room. “What made it work was our ability to finesse the network in such a way as to trick the system into thinking 86 Trinity Place was still working,” says Charles McQuade, who retired in June after 21 years as SIAC’s chief executive officer. “The member firms didn’t have to do a bloody thing.”
Says Joseph Anastasio, New Yorkbased managing partner at financial markets consulting firm Capco, “I don’t think there is anyone who doubts that if SIAC wasn’t there and wasn’t as good and as focused and as efficient as it is, then we would never have been able to recover from the events of 9/11 as we did.”
If September 11 highlighted the critical role SIAC plays in the nation’s securities markets, the event may also lead to changes in its mission and in the way it operates. Against the backdrop of economic pressures roiling financial markets worldwide, and given the market mergers and other restructurings stemming from those pressures, SIAC may also be in store for a change in its ownership structure: It is currently two thirds controlled by the NYSE and one third by the Amex.
For most of its three-decade existence, SIAC has been very much a silent partner of its owners. Charged primarily with keeping the exchanges’ trading systems, backup sites and communications lines running smoothly, SIAC manages a fiber-optic network that links multiple data centers and handles 99 percent of the orders coming in from member firms. SIAC also maintains the messaging systems -- known as SuperDot -- that route orders to the respective exchanges. And SIAC provides processing services to a third major customer, the Depository Trust & Clearing Corp. and its affiliates. Add it all up and SIAC systems touch virtually all of the equity and fixed-income securities held in the U.S. on any given day.
PostSeptember 11, SIAC suddenly gained a much higher profile, as the exchanges’ technological requirements took center stage. Not least was the need for better backup and recovery plans. For all the ingenuity SIAC and the exchanges used to get up and running, the markets were closed for four days -- their longest shutdown since the weeklong hiatus for the Bank Holiday in March 1933. The Big Board and the Amex were caught unprepared and without adequate facilities to continue trading. That’s not SIAC’s fault, of course; it’s the result of policy decisions made by its owners and of contingency plans that failed to envision a catastrophe on that then-unimaginable scale. Now the exchanges are working to rectify those weaknesses by strengthening their backup capabilities with new and expanded trading floors and a modernized communications network -- and SIAC is responsible for making all of that happen.
Underscoring SIAC’s newfound importance to its majority shareholder, the NYSE in June installed one of its own, cochief operating officer Robert Britz, in the additional role of chairman and CEO of the utility, succeeding McQuade. Now industry observers are watching intently to see how Britz and his boss, NYSE chairman and CEO Richard Grasso, will operate the historically secretive, 1,500-employee, $500 million-in-revenue technology shop.
Britz, 51, a SIAC director since 1995, heads a three-member office of the chairman that includes presidents and cochief operating officers Joseph Kubat, 55, and Richard Edgar, 57. Kubat is a 22-year SIAC veteran who for the past two years oversaw its provision of services to the NYSE and recently added Amex responsibilities. Edgar spent 35 years at the NYSE and now manages staff functions like human resources and communications as well as the Depository Trust data center and SIAC’s for-profit Sector subsidiary, which provides networking and computing services to financial institutions.
Britz’s goals are straightforward but will be complicated to execute. He aims to institute business continuity measures that will ensure that the industry never again faces breakdowns on the disastrous scale of September 11, and he wants to provide the new technologies necessary to keep SIAC’s owners competitive with other markets around the world -- and with the alternative trading systems and electronic communications networks that are taking market share from traditional floor-trading venues like the NYSE and the Amex.
These objectives raise particularly sensitive strategic and political questions: Will the NYSE be able to maintain its open-outcry tradition, and should it, if the economics of electronic markets argue otherwise? What will become of its junior partner, which surely doesn’t figure too prominently in the NYSE officials’ long-range thinking, except as perhaps a takeover target? And should the Amex get uncomfortable -- and it has been squirming in recent years -- how much trouble will that cause SIAC and the NYSE?
Britz is quick to downplay any sense of a NYSE takeover. He emphasizes that SIAC is a utility in service to its owners and their members. “It is less a creator of initiative and more an implementer,” Britz says of SIAC. “It is SIAC’s customer base -- the NYSE, Amex, DTCC and the industry -- that identifies the business need.”
Britz does acknowledge that his appointment at SIAC sends a message about the importance of technology to the NYSE and about the exchange’s intent to control its destiny. “SIAC is mission-critical to NYSE. The stock exchange would not occupy the position that it does in the U.S. capital markets but for the contribution that SIAC has made over the years,” says Britz. He adds, “Rather than indirectly managing SIAC on behalf of the NYSE, I am doing it a little more directly going forward.”
Yet Amex officials say they are content with the arrangements. Says CTO Ravi Apte of SIAC, “They are fully committed to us.”
There is clearly a lot at stake. SIAC is a major budget item for the two exchanges, which are increasing their technology expenditures by 10 percent a year. Of the NYSE’s $841.8 million in total expenses last year, $256.9 million went to SIAC. The Amex spent $104.9 million on SIAC, out of $289.7 million in costs. SIAC’s other major revenue sources were its Sector subsidiary ($63.6 million) and DTCC’s National Securities Clearing Corp., ($54.7 million). On total 2001 revenues of $493.9 million, SIAC earned $10.3 million.
Despite the budget-cutting atmosphere on Wall Street, Britz says that SIAC is investing in its future: “Technology is one of the last places that we would want to cut in any sort of difficult environment.” At the same time, SIAC’s purpose is “to find cost-effective technical solutions in service to the industry. That is an enduring mission that does not need to be tinkered with.”
Given the upheavals in world markets, the unit could be in for much more than a little tinkering. Most notable are rumors that the NYSE and the Amex might merge. It has been an oft-speculated-on possibility since the National Association of Securities Dealers, which acquired the Amex in 1998, announced in April 2001 that it wanted to spin it off. NYSE chief Grasso stoked speculation in March when he acknowledged that he was considering a takeover. The exchanges decline to comment on the status of negotiations.
There is some logic for a deal: The Big Board could use the Amex’s strengths in options and ETFs to compete more effectively against the ECNs and Nasdaq. With that broader portfolio, and with SIAC ever more closely integrated, the NYSE could enhance its own market value, which could in turn be an asset if it demutualizes and issues shares to the public.
“Advanced technology is seen as a way to pump up the worth of exchanges,” says Robert Iati, research director for securities and capital markets at Needham, Massachusettsbased research firm TowerGroup. He thinks that Britz and company’s move into SIAC could be a prelude to the NYSE’s ultimate takeover of the Amex and their shared technology.
Capco’s Anastasio is betting on what he calls “an out-and-out business consolidation [between the NYSE and the Amex], and if not that, then cooperation between the two exchanges on a very strategic level on infrastructure and processing.” He sees that as a direct outgrowth of September 11: “The cooperation among SIAC, the NYSE and Amex underlined how much sense cooperation made and how efficiently the three could work together. Whether that becomes the catalyst for a full-blown merger or something else at the processing and infrastructure level remains to be seen, but something is going to give.”
SIAC OPENED ITS DOORS in 1972 -- coincidentally, the year Britz went to work for the NYSE. The financial industry was then inching its way into the computer age out of necessity. The paperwork crisis of the late 1960s and early 1970s had forced the NYSE to take drastic measures like closing the markets on some days to enable member firms’ back offices to catch up. Daily share volumes were then under 20 million. “Today our run rate is 1.4 billion shares a day,” Britz points out. “And we do that with fewer people on the floor and marginally more space. That gives you a sense of what SIAC and the NYSE have done together.”
SIAC was one of several industry utilities started at about the same time that automated and streamlined the complex flows of funds and documentation between institutions. These joint ventures -- others include the DTCC for securities clearing, the New York Clearing House’s Chips network for large money transfers and the global Swift messaging network for funds transfers and securities settlements -- enabled the industry to spread its systems costs while reducing risks. The NYSE and Amex reasoned that with SIAC, each would not have to develop its own back-office facility, and they could share the benefits of economies of scale.
But competitive issues threatened the spirit of cooperation. After the NASD -- in its since-modified role as the parent of the Nasdaq Stock Market -- acquired the Amex in 1998, it planned to consolidate the technologies, which would have meant a loss of business for SIAC. That never happened: The plan turned out to be more complicated than anticipated, and the NASD turned most of its attention to upgrading Nasdaq’s systems, which it considered a higher priority. Then the Amex explored moving its SIAC services in-house; the exchange was disenchanted by the NASD experience and concerned that the NYSE would tighten its grip on SIAC and shortchange the Amex. “Amex essentially wanted to take control of its own technology because it was of strategic significance,” recalls McQuade.
In other words, the Amex was arriving at the same conclusion as had the NYSE: that technology was too important to delegate. And then, as Capco’s Anastasio puts it, “9/11 happened.” Suddenly, tensions between SIAC’s owners eased. Amex was so pleased with SIAC’s performance that it decided to stay put. Amex CTO Apte says that the exchange is satisfied that SIAC is “professionally managed and unbiased.” Adds Britz, “I worry less about my erstwhile competitor and more about challenging ourselves so that we do better tomorrow than we are doing today.”
Peace in the boardroom lets Britz and his team concentrate on their immediate priorities, which include planning for a new NYSE trading floor and dealing with the ongoing concern of keeping the infrastructure “ahead of the growth curve” of exchange volume, which is running 15 percent above last year’s.
One project now under way, the Secure Financial Transaction Infrastructure, or SFTI (pronounced safety), addresses the communications breakdowns that occurred on September 11 by giving member firms multiple ways of transmitting electronic orders to market data centers. Member firms will connect through various broadband communications hubs throughout the New York metropolitan area. By linking to at least four of these hubs, a brokerage gains maximum assurance of connectivity. “There are multiple data centers, and [firms] have redundancy by connecting to each of them,” explains Britz. “Now they will get further redundancy by having multiple hubs that connect to multiple data centers through high-speed fiber-optic lines in an IP [Internet protocol] network.”
Less straightforward or predictable are changes in the competitive landscape and how SIAC will help the exchanges respond to them. One looming threat is Nasdaq’s recent introduction of SuperMontage, an advanced, ever-more-inclusive display of the order book that is also expected to give the ECNs a run for their money.
Christopher Keith, a former CTO at the NYSE and a onetime SIAC executive, says that the floor-based markets must be prepared for a more subtle threat. Keith, now CEO of ExchangeLab, a New Yorkbased market technology developer, predicts that over the next two to three years “intelligent agent” systems will emerge that combine the power of computerized trading with the human touch of telephone-based dealing. That, Keith believes, could further erode the NYSE’s open-outcry volume, and he doubts that SIAC can engineer an effective response. “No innovations or new ideas come out of SIAC,” he says. “It’s mainly there to keep the turbines moving.”
For now, that’s fine as far as the Amex’s Apte is concerned. His need is simple -- a systems overhaul aimed at making his infrastructure cheaper, more reliable and more easily expandable when volume requires -- and SIAC is carrying out those changes. If SIAC’s “turbines” don’t fill the bill, the Amex is free to buy elsewhere, as it did two years ago when it outsourced options processing to Sweden’s OM. “Options exchanges have a different set of challenges,” notes Apte.
SIAC’s other customer, the DTCC, which includes among its 152 shareholders the major exchanges, also exhibits an independent streak. DTCC’s clearing subsidiaries cut their SIAC spending by 29 percent last year -- not out of dissatisfaction, says a DTCC spokesman, but because DTCC has reduced its costs by moving some operations in-house.
Not surprisingly, Britz thinks SIAC has more to offer than basic blocking and tackling. Besides running its core trading engine, largely with homegrown software, SIAC also integrates other companies’ technologies in what Britz describes as a “general contractor” role. Over the past year and a half, for example, SIAC has helped the NYSE implement Direct+, for rapid execution of orders of up to 1,099 shares, and E-Broker, a wireless order management tool. “The trading floor, almost paradoxically, is one of the great examples of how the productivity promise of computerization is being realized,” Britz argues.
But David Furlonger, vice president and research director at Stamford, Connecticutbased consulting firm GartnerG2, says that if exchanges want to operate as truly commercial enterprises that minimize expenses to maximize profits, then they’ll inevitably have to go electronic and get away from open outcry. “A fundamental issue going forward will be, ‘Are they able to use technology to fundamentally revolutionize their business model? Or are they using technology merely to incrementally evolve existing business practices?’ I would suggest that the NYSE has been in the evolution camp and not the revolution camp.”
Britz disagrees. “There are various initiatives in progress that will get the NYSE to a paperless trading floor in the next 12 months,” he vows. Adds exSIAC chief McQuade: “I would not bet against the NYSE. There is no patience there for systems that don’t work.”
