PHLX Sees Role for Exchanges in Assisting ATSs
ECNs look to regionals for multiple display facilities
October 22, 2007
The Philadelphia Stock Exchange (PHLX) is exploring ways that electronic communications networks (ECNs) and other alternative trading systems (ATSs) can utilize the exchange, a move that follows other exchanges' efforts to allow ECNs to quote on their systems and provide redundancy when disruptions occur.
"We are exploring opportunities to support a variety of business models in an exchange environment, and certainly ECNs fall into that category," said Paul Roland, VP of project management at PHLX.
Roland declined to confirm whether the exchange planned to provide the same type of service as Chicago-based National Stock Exchange or New York's International Securities Exchange (ISE). "Anything the Philly can do to provide value to market participants and innovations in market structure ... we're certainly looking in that direction," Roland said.
Roland noted that PHLX is considering "all the assets we have," including the Stock Clearing Corporation of Philadelphia (SCCP), the only functioning clearing agency outside the National Securities Clearing Corp. (NSCC). In a process that's integrated with NSCC, a Depository Trust & Clearing Corp. subsidiary, SCCP continues to clear and settle trades for brokerages that acted as specialists on the exchange before it became completely electronic.
The Boston Stock Exchange (BSE) also has such a license, but it is not currently in use. One of the reasons for Nasdaq Stock Market's acquisition of BSE last month was a desire to use the license to reduce its clearing and settlement costs.
Ultimately, Roland said, the avenues the exchange pursues may extend beyond ECNs to other types of ATSs, such as dark books, or matching engines that do not display quotes. "There are roles we think exchanges may be able to play to help ATSs in general, not just ECNs," he said.
Splitting Quotes
NSX was the first regional exchange to permit ECNs to display quotes on its system, after Nasdaq pushed, for competitive reasons, to eliminate the ability of ECNs to quote on the Nasdaq Market Center. BATS Trading, which opened for trading in January 2006, announced in April 2006 that it would begin quoting on NSX. Three months ago, it also began quoting on ISE, prompted in part by recent spikes in messaging volume that have resulted in occasional disruptions at most market centers.
BATS' strategy has worked out well. On Oct. 12, ISE experienced a power "imbalance," and although it was still mostly functioning, the exchange decided to shut down trading for an hour and fifteen minutes, a situation spokesperson Molly McGregor said hadn't occurred in six years. BATS, which splits its quotes between the two exchanges, shifted them all to NSX. Similarly, NSX experienced technical difficulties Oct. 17; the ECN declared "self-help" and moved all of its quotes to ISE, said Randy Williams, a BATS spokesperson.
To avoid future imbalances, McGregor said that ISE has initiated an audit of its power infrastructure at both its primary and backup server sites "to make sure there's complete power diversity at both sites, for all servers and all network equipment." It is also working with its third-party facilities management firm in New Jersey to ensure it has the proper power monitoring and control procedures in place.
So far, BATS appears to be the only ECN quoting on two regional exchanges, and it plans to take advantage of additional redundancy options. Williams said it has received positive feedback from users on the strategy, with one high-volume East Cost participant saying its confidence in and use of BATS had increased significantly. "If someone else develops an order delivery tool, we'll consider using that as well," Williams said.
