In an effort to attract more order flow and boost its equities trading volume, the Philadelphia Stock Exchange (PHLX) plans to launch a remote competing specialist system that will allow brokerage firms to make two-sided markets in PHLX stocks outside of the floor of the exchange. Before it moves forward with this plan, however, the PHLX must first get approval from the Securities and Exchange Commission, which is currently in the process of reviewing a pair of competing specialist rule changes the PHLX recently filed.
Essentially, the PHLX has asked the SEC for permission to launch an off-site specialist system that would for the first time allow multiple specialists to trade a single PHLX stock. "The floor system in Philadelphia is now set up with one specialist representing one stock, fore each issue the exchange trades," says Steven Sears, senior advisor to PHLX Chairman and CEO Sandy Frucher. "But now what we're doing is opening it up and saying 10 specialist firms could conceivably trade, for example, Pepsi Cola. And one guy could do it from a sailboat, one guy could do it from an office in Philadelphia and (another) guy could do it from (a location) in New York."
The PHLX, says Sears, expects the SEC to rule on its remote competing specialist system filing in the near future. If, as expected, the commission gives the exchange the green light to move forward, the yet-to-be-named specialist system will be rolled out in January of 2001. "What we intend to do around the first of (next) year is start a remote competing specialist program," Sears says.
William Morgan, chief information officer of the PHLX, says the exchange expects to complete the "technical" development of the off-site specialist system within the next two weeks. The system, which will be driven by Stratus Computer-supplied servers on the back end and Sun Microsystems' Solaris operating system on the front end, has been built using PHLX's existing electronic equity order book technology. "The new (specialist) system is based on that book ... All the current functions or features that the existing equity (order book) system affords to specialists on our trading floor are now going to be afforded to competing specialists on a remote basis," says Morgan.
The PHLX has already signed up two firms to perform beta tests of the off-site specialist system, which will require end-users to be equipped with a Sun Solaris workstation and an interface to the exchange's trading network. While declining to specify the firms that have agreed to test the system, Morgan says that the PHLX is fully prepared to train clients on its "user-friendly" specialist platform. "We are going to be deploying a network and equipment outside of the exchange, on customer sites. So we're putting a team in place to be able to deal with the technical aspects of that, as well as the training aspects of that," he says.
The target audience for the off-site specialist system will include existing, floor-based PHLX specialist firms and brokerage firms that currently trade equities at other regional exchanges. Some brokerage firms, explains Sears, want the ability to act as a PHLX specialist without actually maintaining a post on the floor of the exchange. The new system has been developed for them, as well as for existing specialist firms that want to supplement their floor business.
By taking its existing floor structure and making it electronic, Sears says, the PHLX figures to attract to boost its equities order flow, volume and liquidity. "One of the key issues is liquidity ... If you can enhance liquidity, that's a win-win (situation)," he says.
Morgan says that one of the ways in which the off-site specialist system may improve the PHLX's order flow is by giving its member firms more order routing choices. "With a remote competing specialist system, if a particular member decides that a particular specialist's trading business model does not match theirs, they will now have an alternative to direct order flow to another specialist," he says.
Specialist firms that use the off-site specialist system will clear trades in the exact same manner as floor-based specialist of the PHLX. "We will use our clearing services business to package the various trades and the contra-side, and then that (data) will be shipped over to the National Securities Clearing Corp. for clearance," says Morgan.
The PHLX, of course, trades both equities and options. The options business, as of today, is far more successful -- but the PHLX hopes to improve its equities performance via the launch of innovative platforms like the off-site specialist system.
If the PHLX follows through with its plan, it will not be the first regional exchange to roll out a remote specialist system. The Boston Stock Exchange launched a similar system, dubbed Beacon Remote, last September.