PHLX and NYSE Lend the Amex a Helping Hand
This was a tragedy of unimaginable proportions, and had not been really contemplated," says American Stock Exchange Chief Information Officer Ravi Apte. "Going forward, we clearly have to have a complete rethink of our contingency plan, in the light of this disaster." Unquestionably, when terror dug its claws deep into the heart of the world's financial headquarters on the morning of Sept. 11, no exchange faced greater challenges than the Amex. Located just a few hundred feet from the epicenter of Ground Zero, the Amex not only had to evacuate all of its market participants, but also quickly find a temporary home for the hundreds of specialists, market makers and floor brokers that drive its equity and options markets. Indeed, time was of the essence, because the leaders of the U.S. equity and options market---in collaboration with the SEC--decided they were going to reopen for business on Sept. 17, just six days after the assault.
Moreover, as if the exchange did not have enough problems, there was one other significant obstacle to hurdle: the Amex did not have any back-up trading floors in New York. So, with the clock ticking, the exchange did what many of its financial services colleagues were forced to do: it reached out to its competitors for help.
Shortly thereafter, after exchanging ideas with competitors and regulators, the Amex formulated a two-pronged plan. Participants in the exchange's options market, it was decided, would be rerouted to the floor of the Philadelphia Stock Exchange (PHLX), while the Amex's equities and exchange traded funds (ETF) specialists and floor brokers would migrate to New York Stock Exchange's trading facility.
Of course, executing these emergency maneuvers would prove much more difficult than scheming the alliances. In the course of five days, roughly 600 Amex staffers had to be relocated and trained at the PHLX, while more than 150 had to get situated at the NYSE. What's more, whereas Amex equity and ETF participants at the NYSE would be allowed to trade under Amex rules, using Amex trading systems, Amex options participants would have to trade according to PHLX rules, using PHLX-supplied trading systems. "That had to be the case, because we didn't have the time to change (our server) applications to do it in a different way," says PHLX CIO William Morgan. "Obviously, we had to support our (options) floor as well .... So we had to basically adopt one set of rules and one set of system functions."
Emphasizing that the PHLX and Amex use different hardware architectures, Morgan says that launching any of Amex's flagship trading systems on the PHLX's floor would have been close to impossible. Just as significantly, he says, the PHLX's contingent of Amex refugees was comprised primarily of market makers. The functions of Amex specialists and floor brokers, he says, were largely assumed by their counterparts at the Amex--counterparts that obviously did not have to be trained in PHLX technology.
In lieu of relying on Amex specialists, designated PHLX options specialists, says Morgan, were given additional Amex issues to trade. Those options contracts were integrated into the PHLX's electronic options order book, known as the X-Station.
"We have some of the same specialists units that (the Amex) has on the floor, so what happened is those specialist units just absorbed more work," Morgan says. To accommodate the additional business that its specialists picked up, the PHLX augmented its floor by rolling out an additional 25 X-Stations.
Similarly, on the floor broker side, PHLX's floor brokers inherited extra business and, where needed, the exchange installed additional broker order-entry and comparison terminals.
After getting briefed on the PHLX's rules, many of the market makers who made the journey to PHLX were equipped with handheld PCs, courtesy of the PHLX's clearing firms. Those devices, says Morgan, are similar to the wireless handhelds marker makers use on the Amex floor. "The clearing firms supplied the additional equipment, while we laid the wires," says Morgan.
From a technology perspective, Morgan says the PHLX's most daunting task was creating a securities master file that could accommodate 1,065 new options classes from the Amex. The Amex and PHLX, he says, had to not only merge their security master files--which contain profiles of every options symbol--but also had to make sure that all of their data matched up with the securities master data on file at the Options Clearing Corp. (OCC), the PHLX's clearing organization.
Moreover, on top of having to add about 35,000 symbols to its merger securities master file, the PHLX had to deal with uncertainty surrounding which Amex issues each of its specialists were going to be assigned. "We had to take the Amex file as they knew it, make sure it matched the (data) the OCC had, and then merge that with what we have. That turned out to be a pretty significant job, mainly because the data that we needed really didn't all become available until the Saturday before the options markets reopened," says Morgan. "Throughout this whole process, (we) were still finalizing who was going to trade what on the floor ... (and) until you know who's trading what and what's being listed, you can't load all that information into the securities master."
Like the market makers who made the transition to the PHLX's floor, Amex specialists, clerks and floor brokers who relocated to the NYSE's floor had to adapt to a new trading environment. However, in contrast to their market maker brethren, the NYSE-based Amex participants did not have to learn new rules or be trained on new technology. "I think what it really boils down to is where we could take our (trading) network, and we could not take that to the PHLX, because we did not have compatible devices," says Amex's Apte. "But with the NYSE ... we were able to luckily and successfully bridge (our) two networks because they are supported by the same communication/engineering team at the Securities Industry Automation Corp."
SIAC, a joint subsidiary of the NYSE and Amex, serves as the information technology arm for both exchanges. This common ally, says Apte, provided Amex with the ability to rapidly deploy its own software, including its electronic equity order book, at the Amex specialist posts set up on the Big Board's floor. After the exchanges established a link between their trading networks, he says, the Amex drove its software on the floor of the NYSE from its application servers at SIAC.
Amex's equity specialists actually use an older version of the NYSE's Point-of-Sale electronic equity order book. Apte, who describes the NYSE's version of POS as "much more recent," says the fact that the NYSE and Amex share similar equity order book technology was not as important as the fact that their collective specialists use the same front-end terminals.
The NYSE, he says, was kind enough to lend Amex participants hardware--including overhead display monitors and a "couple of hundred" X Terminal devices. X terminals, Apte explains, are "not PCs" but "industry standard" workstations that run on X Windows.
Unlike its specialists and specialist clerks, the Amex's floor brokers did not gain immediate access to the NYSE's floor when the U.S. equity markets re-opened on Sept. 17. However, later on in that week, says Apte, a handful of Amex's floor brokers were given permission to trade on the Big Board's floor. "We were able to get approval to move in 10 of the Amex's floor brokers .... They had one phone line set up per broker, so they could get orders from upstairs and then walk them to our specialist posts and transact," he says.While declining to list the reasons why only a handful of brokers were granted access to the NYSE, Apte also says that none of the Amex's equity and ETF market makers were relocated to the Big Board. "It was not practical to bring these market makers in, (because) the floor of the NYSE is not designed for market maker activity in the crowd," he says.
Still, despite the fact that it was not able to relocate all of its market participants, the Amex was able to operate from foreign trading floors, without any disruptions in service, for a full two weeks. And, while lauding the performance of roughly 100 Amex IT staff who worked round-the-clock for weeks in the wake of the disaster, Apte says that a lot of credit must be given to the PHLX and NYSE. "The NYSE and PHLX were extremely gracious in support of our markets," he says.
Now that Amex is once again up and running at its 86 Trinity Place headquarters, however, it is only natural to cast an eye towards the future. In the aftermath of the disaster, Apte says that three areas the Amex must closely scrutinize are: member connectivity, voice connectivity and back-up trading floor options. Of those three, the one that poses the largest dilemma at the moment is the trading floor issue. "We are fully redundant when it comes to our data centers and server farms .... But we do not have a parallel trading floor of any dimension," says Apte. "So do we make arrangements with other people, or do we set up a separate floor?"
The answer to that rhetorical query is important, especially when one considers the significant costs tied to the Amex's emergency relocation. Apte declines to speculate on how much money the exchange spent on staff migrations and technology changes, but says that the World Trade Center attacks effectively pushed back the Amex's timeframe for key technology initiatives--such as the launch of new equity and options order books.
Down the road, the Amex will certainly have a better idea about the overall monetary toll the evacuation and subsequent trading floor relocations had on its exchange. But now is not the time for Amex to worry about costs, says PHLX's Morgan. "Money hasn't been at the top of our thoughts. This was a national tragedy and we wanted to help," he says.