Beyond The Margins: Systems Explore The Twilight Zone

Trading systems broadly outperformed the markets -- at least during Monday's debacle -- but the systems picture was not all sweetness and light.

Monday's bust and the wild fluctuations which followed posed an endurance test for man and machine. Sleepless nights and coding-on-the-fly were rife as the crush of trading kept shell-shocked systems people struggling to keep pace.

The technology generally did what it was designed to do. Problems arose when extraordinary volume combined with unusually large bid-ask spreads to create trading conditions the systems were not configured to handle.

The toughest nuts occurred in management of order flow at the exchanges. On Thursday, the Pacific Stock Exchange shut off its glutted automatic execution system. For member firms, street-side reconciliation and customer-side position keeping was the chief cause of sleeplessness.

This back-office swamp led to the decision by all North American stock exchanges to close two hours early for three consecutive days, a state reminiscent of the 60s, when many of today's traders were but teenyboppers.

Price reporting systems functioned well, and quote vendors crowed about their performance during the crisis. But delays in order handling at the exchanges meant that the price on the screen was a good nine yards from the execution price for a market order.

Investors experienced their share of frustration as individuals lost telephone contact with discount brokers, and institutions were restrained from making program trades.

Market orders entering SIAC's common message switch are segregated and queued prior to delivery to the various order routing and automated execution systems at the exchanges.

During the hot spots, order queues at all levels -- at the switch, at the exchange, and in the display books themselves -- were much longer than usual; longer, in fact, than systems designers ever imagined they would be.

On Tuesday afternoon, limit-order files for three quarters of the NYSE floor overflowed and programmers were forced to write programs to create new files. Order queue files overflowed because execution throughput at the exchanges wasn't sufficient to relieve them. This occurred because:

-- even when functioning flawlessly, order printers at trading posts couldn't print tickets as fast as orders were routed to them;

-- specialists had difficulty coordinating exposure and execution of orders, and

-- trading was stopped in many issues while orders continued to pour in.

The result was a longer than usual lag between the time orders were sent to the common message switch and the time they were actually executed. This wrinkle in the system had unfortunate side effects on the high-speed ticker taken by quote vendors.

Many onlookers confused this delay with the well-known lag between the NYSE Network A high-speed line and the low-speed ticker. Because the low-speed ticker only has a throughput of about 90 characters per minute, it often can't keep pace during ordinary peak volume periods, much less last Monday and Tuesday.

George Levine, executive vice president at Quotron Systems, Inc., reports that his own buy order was executed at a price four points away from that displayed on his own terminal when he called his broker. He modestly declines to identify the issue.

Registered reps accustomed to the smooth functioning of Superdot made erroneous confirmations by phone after seeing the price of their limit orders appear on quote screens.