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Network Flounders in Age of Decimals and High Volumes

May 23, 2000

NEW YORK -- In its current configuration, Nasdaq runs two computer systems -- one for handling trades, the other for distributing price quotes.

The trading system comprises SelectNet, the main trading system that links electronically Nasdaq participants; SOES, a small-order execution system; and ACT, an automated confirmation transaction service.

The trading technology can handle higher volumes by increasing the number of parallel paths between computers in the network.

The system has had serious problems last autumn, crashing for 20 minutes one day last November. Nasdaq said the problem was due to a bottleneck in the system, and has since replaced a single network switch with several parallel switches.

In a speech in March, however, Securities and Exchange Commission chairman Arthur Levitt said that SelectNet "continues to be plagued with shortcomings, delays during heavy trading volume, and even outages".

He added: "Given the decentralised nature of the Nasdaq market, this is a critical and core flaw -- and one that must receive intense scrutiny and committed resources until resolved."

Market participants agree with that assessment.

"We have had hundreds of thousands of dollars in errors because of problems with SelectNet," said Mr Douglas Atkin, chief executive of Instinet, the largest of the new electronic communications networks (ECNs), that are close on Nasdaq's heels.

ECNs are fully automated trading systems that match orders for trades without human intervention.

Nasdaq's other system, used to distribute stock quotes to market participants, also needs to be converted to trade in decimals instead of fractions.

It depends on a Unisys computer, which Nasdaq says uses only about 62 per cent of its processing capacity. It is being replaced by a system called the Integrated Quote Management System, which can handle decimals but transmits fewer quotes.

Nasdaq's decision to install a new system with far less capacity than the old one has puzzled congressional critics.

In reply, Nasdaq officials cite the difficulty of estimating the volume of quotes transmitted over its computers, which has surpassed past projections by quadrupling over the last year.

They say they expect to have more time to phase in additional capacity. -- Washington Post

http://finance.individual.com/display_news.asp?doc_id=PR20000522LAM129&page=news

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-- (Dee360Degree@aol.com), May 23, 2000