Technology and performance: the evolution of market mechanisms

Business Horizons, Nov-Dec, 1989 by David J. Wright

Growth in Trading Volume

The third fundamental factor driving the technology in equity markets is the explosive growth in trading volume. In the late 1950s, two million-share days were commonplace on the NYSE. When daily volume unexpectedly increased to over six million shares in 1965, the NYSE initiated a long-term planning report. The 1965 report forecast an average daily volume of ten million shares by 1975. That level was attained in 1967, a mere two years later. As the growth continued in the late 1970s, NYSE chairman John Phelan raised eyebrows when he insisted on preparing for the 100 million-share day. Yet, the first 100 million-share day occurred in 1982; now 200 million-share days are commonplace. October 1987 demonstrated that 600 million-share days are possible, even though the NYSE's stated capacity at that time was only 450 million shares.

Much of the current technological effort is devoted to increasing the capacity of the equity markets. The markets must have the ability not only to execute trades but also to handle the trades with a minimum possibility of error or fraud. To retain the confidence of investors, the markets must be able to provide the latest information on quotes and trades in the face of heavy trading volume. Consequently, the 1980s have witnessed an explosive growth of trading technology to keep pace with the growing market.

TECHNOLOGY IN THE MARKETPLACE

Dramatic technological changes have swept across the exchange trading floors in the past decade. The emerging technology of Wall Street has created a quick-reacting computerized market that is capable of exhibiting Himalayan highs and lows in a very short time. Although congressional and SEC actions were a catalyst for positive change, the latest technologies are more importantly a response to the market's institutionalization and the surge in trading volume. The U.S. equity markets form a national industry whose evolution is a necessity in the global marketplace. As our equity markets become more interrelated through the new technology, they are no longer just a national market system, but an international one.

NYSE

Although all the U.S. equity markets have experienced dramatic growth, the NYSE still remains the dominant market. The technology during the 1960s involved the first third-generation computer, the IBM 360, which replaced hundreds of trays containing punch cards and many of Wall Street's mundane jobs. The slow, unreliable tab equipment has long since been replaced by a variety of new trading technology.

The NYSE has made significant strides in securities technology. To cope with the increasing volume in 1976, the NYSE introduced the DOT (Designated Order Turnover) system. DOT is an electronic order-routing system through which member firms transmit market and limit orders directly to the specialist post. In the past 15 years the DOT system has been enhanced and expanded, at a cost of over $150 million.

The latest version of the system, called SuperDot, is the largest and most sophisticated order processing and post-trading system in the country. The orders sent by member firms to the specialist post are exposed and executed in the agency auction market. Specialists then use SuperDot to return the execution reports to the member firms and simultaneously submit executed trades to the comparison process on a locked-in basis. On an average day, three-fourths of the NYSE orders are processed through this system.