The spokesman also declines to say how much money the NYSE spent on its backup-trading floor, but one thing is clear: The Big Board has the capital to build a disaster-recovery floor on its own. Some smaller regional exchanges, on the other hand, must pay close attention to costs when considering what disaster-recovery route they should take. ""We scoped out the requirements for (a backup floor) pretty thoroughly, and it's an enormous dollar amount. It costs anywhere from $25 to $40 million just to build it. And if you build it, you have other expenses because you have to staff it and use it,"" says an executive at a regional stock exchange.
PHLX and Amex: Sharing, Anyone?
The Philadelphia Stock Exchange, a regional market that trades options and equities, has in the past been reluctant to build a disaster-recovery trading floor because of financial concerns. But following Sept. 11, the exchange recognized that it absolutely had to replicate its data center and trading floors, says PHLX Chief Information Officer Bill Morgan. In an ideal world, he says, the PHLX would share the costs of maintaining a disaster-recovery trading facility with another exchange, because that would be the most ""practical and cost-effective"" solution. However, due to the fact that it has yet to engage in any ""serious"" disaster-recovery-sharing talks with other exchanges, the PHLX is now leaning towards building a facility on its own, says Morgan. ""That is the ultimate, the Mercedes of backup plans. But with that comes the Mercedes price tag. That's the challenge for smaller exchanges, in particular,"" he says.
One way in which the PHLX may be able to reduce its disaster-recovery ""price tag"" is by using an all-electronic backup solution for its smaller equities floor. The exchange, Morgan notes, has already built a so-called remote-competing-specialist system that allows equities specialists to conduct business away from the floor of the exchange.
""We have the capability now with this system for a specialist to operate remotely, just as if they were on the floor, with the same suite of technology. So we (may) naturally look to leverage that system in a disaster situation, because ... then you would not have to replicate all of your trading-floor infrastructure,"" says Morgan.
Indeed, if the PHLX decides to use a version of its remote-competing-specialist system as disaster-recovery solution for its equities floor, it will have more financial flexibility to build a backup for its options floor. The PHLX is currently evaluating potential backup sites, both in Philadelphia and the suburbs of the city, but has yet to make any final decisions.
One of the exchanges the PHLX was rumored to have explored a sharing arrangement with is the Amex. The Amex had to relocate its options and equities traders to the floors of the PHLX and NYSE, respectively, because Sept. 11 caused damage to its primary trading headquarters. Though the exchange has had ""sharing"" conversations with multiple rivals, nothing concrete has materialized, and the Amex is therefore now taking steps to build a backup floor of its own, says Amex Chief Information Officer Ravi Apte.
Part of the reason the Amex has had a difficult time finding a disaster-recovery partner, he says, is because it trades a diversified portfolio of products, including equities, options and exchange-traded funds. ""If we tried to go to a new location, we would not be able to just split (participants up) by product, because if we split by product, some constituency on our floor is not going to be represented,"" says Apte.
Apte says the Amex will have a scaled-down, backup version of its trading facility up and running in the near future, but declines to specify a time frame. The disaster-recovery site, Apte says, will cover all of the products the Amex trades from its primary site, and will accommodate all of the exchange's constituents - including brokers, market makers, specialists and specialists' clerks.
Securities firms, just like exchanges, have had to ponder whether it is better to go it alone or seek help. Morgan Stanley, which had to scramble to relocate roughly 3,700 WTC-based employees on Sept. 11, intends to build its own backup-trading facility. ""We're in the midst of forming a plan for a backup-trading floor. But the key for us is it's not going to be the conventional backup facility - it's going to be an active facility,"" says Morgan Stanley Executive Director of Global BCP Greg Ferris. Morgan was able to relocate its displaced employees to locations in Brooklyn and Harborside, N.J., and recently became even more geographically diverse when it decide to shut down one of its midtown offices in favor of a site it purchased in Harrison, N.Y. It remains unclear whether the Harrison site will house Morgan's backup-trading floor, but Ferris says the move shows the firm is clearly trying too become even more spread out.
But are all the different maneuvers being made by the likes of Morgan, the NYSE and PHLX indicative of real disaster-recovery progress? Peter Vinella, chief executive officer of PVA International, a business-consulting firm specializing in capital markets, says that he has ""not seen a big appetite for dark-trading floors and numerous back-office systems"" from PVA's Wall Street clients. Many firms, he says, have slashed their IT budgets in this down economy, and regulators, burdened by a new corporate scandal seemingly every other month, have too much on their plate to aggressively pursue new disaster-recovery regulation. ""I think disaster recovery is an issue that unfortunately got a lot of attention on Sept. 11 and has not really had much follow-up since then,"" says Vinella. ""Unless there is another terrorist attack ... the spotlight (will remain) off of disaster recovery.""
However, Jim Scurlock, a senior manager in Cap Gemini Ernst & Young's Financial Services Industry practice, says that financial-services firms are definitely focused on disaster recovery. ""The CIOs that we've talked to are looking at disaster recovery extremely critically ... . They don't really need any regulation, because they are extremely clear on what needs to be done,"" he says.
Meanwhile, while expressing confidence in the progress the industry has made to date, the Amex's Apte says that the only way we will learn the truth about the enhancements firms have made is if there is another disaster or emergency. ""I think a lot has been done, but you will never get the full answer to your questions until the real occasions arise,"" he says.
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All-Electronic Exchange: The Perfect Disaster-Recovery Solution?
Should open-outcry-driven exchanges wave goodbye to their trading floors in favor of complete automation? U.S.-based, floor-driven exchanges - including the American Stock Exchange, New York Stock Exchange, Chicago Mercantile Exchange and Chicago Board of Trade - have had to listen to that controversial question for more than a decade. Following Sept. 11, however, the open-outcry-versus-all-electronic argument took on heightened significance when critics began suggesting that the best way for exchanges to prepare for another disaster is to do away with their trading floors altogether.
Indeed, the New York exchanges have faced particularly tough scrutiny over their open-outcry methods, as the topic of back-up trading floors has ascended into the financial-services spotlight. All-electronic proponents recall that the American Stock Exchange, located just a few hundred feet from Ground Zero, could not open after Sept. 11. Even more importantly, they note that though its physical facility was not damaged by the World Trade Center attacks, the NYSE - the heart of the U.S.-equities market - did not reopen until Sept. 17.
Undoubtedly, part of the reason the NYSE stayed closed for four days was because some of its members lost their ability to communicate, due to the heavy damage a Verizon telecommunications hub - located near the World Trade Center - sustained. Still, skeptics continue to wonder whether the NYSE would have been able to get up and running sooner had it not been driven by an open-outcry model. Moreover, they question why the NYSE - or any other exchange - would go through the expensive and time-consuming process of building a back up-trading facility, when automation would be a more logical disaster-recovery solution.
""Floors in and of thesmelves are inherently expensive to maintain and keep. You have A/C requirements, power requirements and space requirements ... . But all of that goes away in an electronic environment,"" says a high-ranking executive at a U.S.-based exchange.
Peter Vinella, chief executive officer, PVA International, a consulting firm specializing in capital markets, says that floor-driven exchanges are complicated and costly to back up - especially large markets such as the NYSE. The specialists at the NYSE, he says, have a vested interest in maintaining the exchange's existing business model, and the Big Board has consequently addressed disaster recovery cautiously. But Vinella, whose firm provided business-continuity-planning advice for a handful of Wall Street clients after Sept. 11, says the NYSE will be vulnerable to another disaster if it continues to maintain its status quo.
""Quite frankly, because of the open-outcry method that (NYSE) employs, there is no way that they can adequately back up the exchange,"" he says. ""There are 3,000 business people that support trading on the exchange floor. 3,000 people. Where are they going to go? How are you going to move 3,000 people? You can't be geographically too far away. They have 8,000 phone lines, and something like 5,500 handheld electronic devices. To try to duplicate that, the costs are ridiculous and it's totally impractical.""
However, a NYSE spokesman retorts that the exchange has, in fact, already built an ""alternate-trading facility"" somewhere in New York City. The spokesman declines to specify the exact location of that facility, but says it now serves as the backup to the NYSE's prmary trading floor. ""We developed that post Sept. 11, and that facility is available for operation within 24 hours should our main facility be unavailable,"" he says. The spokesman says this back-up facility can ""accommodate the (trading) activity of the NYSE,"" but declines to provide details about its size dimensions and technological capabilities.
Eric Berg, chief technology officer at Richard A. Rosenblatt & Co., an execution-only institutional-brokerage member of the NYSE, says the people who have called for the elimination of the exchange's floor, post Sept. 11, are not looking at the big picture. These critics, he insists, are ""short-sighted"" individuals who suffer from a ""bunker mentality."" Disaster recovery, he concedes, would be less of a challenge if the NYSE were all-electronic, but clients of the Big Board's brokers would also no longer be able to benefit from the best price-discovery mechanism in the world - the exchange's floor. ""I love technology, it's cool, and (the NYSE) wouldn't be doing 1.3 billion shares a day without it. But I think the essence of trading and execution really (occurs) when there is a ticket in the hand of a broker and (the broker) walks into the crowd,"" says Berg.
The Amex, which had to relocate its equities and options participants to the floors of the NYSE and Philadelphia Stock Exchange, respectively, is now seriously investigating the possibility of building a fully redundant disaster-recovery floor. However, Amex Chief Information Officer Ravi Apte says the exchange currently has no plans to get rid of its trading floors. Even if there were no open-outcry-driven exchanges in New York prior to Sept. 11, Apte notes, members still would not have been able to connect to the markets, because of the damage done to the Verizon switching station.
Jim Scurlock, a senior manager in Cap Gemini Ernst & Young's Financial Services Industry practice, says that no exchange is invulnerable. ""If (exchanges) go to all computers and no people, those computers will have to be located somewhere. Wherever those computers are, and I don't care if they're in the middle of the Midwest, if terrorists ... decide to go after those computers, someone is going to be out of business,""
he concludes.
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