October 27, 2000

TSE head blames brokers Member firms' antiquated systems caused exchange to crash, Stymiest says

Garry Marr and David Steinhart, with files from Thomas Watson Financial Post Carlo Allegri, National Post

DETERMINED: TSE's Barbara Stymiest won't pull the plug on CATS.

The Toronto Stock Exchange's chief executive, Barbara Stymiest, laid the blame for the TSE's technical problems yesterday on members using antiquated systems.

For the second consecutive day, billions of trading dollars moved to the New York Stock Exchange when the TSE was forced to halt trading in Nortel Networks Corp. for more than an hour after the open because of computer problems.

"The message is pretty simple. We are not an island. We want to move forward with new technology; the trading activity has to move in step with us," said Ms. Stymiest, adding that only 80% of trades are going through TSE's new computers and the remaining activity is still processed by terminals linked to a CATS system that dates back to 1977.

Despite Ms. Stymiest's feelings, she made it clear yesterday the TSE will not pull the plug on the older terminals, even as the exchange suffered one of its biggest embarrassments when it had to halt Nortel at noon on Wednesday after investors started dumping stock.

Some firms were actually using the old CATS system to their advantage. Brokerages using the CATS terminals had quicker access to trades than those using the new gateway system.

"Some of them made millions arbitraging. The TSE has to answer to this at some point," said the head of one firm that does not use CATS terminals.

After telling reporters in the summer it hoped to have its problems sorted out by Labour Day, then later by October, exchange officials are now hoping for November.

"It is moving ahead every well and it's a a very co-operative approach. What you have to ensure is that the alternative ways of getting orders in to the exchange are all working and working well," said Ms. Stymiest. "We have to be responsible here and make sure our customers can send orders to us."

It's not the first time Nortel has faced trading problems because of the TSE. In June, trading in the stock was halted for four hours because of technical issues.

Nortel officials would offer no comment on the problems but one market observer wondered if it might have the Brampton, Ont.-based company looking south.

"John Roth [Nortel's chief executive] might use this as an excuse to move all of Nortel to the United States," said Brendan Caldwell, chief executive of Caldwell Securities in Toronto. "How hard would it be to co-opt Nortel to the U.S.? Stuff like this doesn't help."

As it is, Nortel is averaging about 14 million shares traded daily in New York, based on the last nine months, compared to eight million in Toronto. On Wednesday, 124 million shares traded in New York, compared to 10 million in Toronto. New York had four times as many trades as Toronto yesterday.

The TSE can get up to an $80 fee for each trade it processes on each side of a deal, which is based on a percentage of the total transaction, but the real loss suffered the past two days is one of reputation.

"The events of the last couple of days have underscored the need to move quickly," said Ms. Stymiest.

Paul Bates, chief executive of Schwab Canada, said there was no question members have to share part of the blame. His firm only completely switched off the older terminals last month.

"As in all things, [switching computers] is prioritization of money. Every firm out there has 70 to 100 projects underway. We just finished transition through Y2K," said Mr. Bates.

He said his firm continued to process transactions through the United States during the halt. "The real cost here is our share of reputational damage that has occurred for the entire community."

Fred Ketchen, chief equities trader at Scotia Capital, said the TSE had little choice but to stop trading in Nortel when the problems started.

"I think it was a very responsible act by the TSE to close down Nortel," said Mr. Ketchen. "If they had not suspended Nortel, the whole market could have gone down and that would have been a lot worse. I think that by shutting it down, they removed an ingredient that could have caused them major problems. Until the new system is up and running, there will be these types of issues."

John See, vice-chairman of TD Waterhouse Group, said most Canadian brokers are quite adept at switching gears and trading in the United States in midstream.

"There was probably a small cost associated with it around the foreign exchange, but I don't think it was huge money."

As for the issue of the TSE's reputation, Mr. See said "the bottom line is that reliability and accessibility are key and always will be. You have to be able to manage capacity and capacity spikes. The TSE hasn't got there fast enough."

SORRY, A SYSTEM ERROR HAS OCCURED: A YEAR OF TSE COMPUTER GLITCHES:

FEB. 18, 2000: Some member firms unable to confirm trades after the Toronto broadcast feed fails.

FEB 21, 2000: Closing bell sounds early at 3:58 p.m. due to a computer glitch in an automatic routing system that helps to fill and confirm orders.

MAR. 7, 2000: TSE halts trading twice due to computer problems, causing it to lose almost half a day of activity. Officials blame CPU hardware.

APRIL 5, 2000: A glitch puts TSE's computer system out two minutes before the scheduled close of one of the most volatile trading sessions of the year. The breakdown is blamed on the TSE's ageing CATS system.

JUNE 1, 2000: The TSE is hit with a computer problem that halted trading in Nortel Networks for four hours. Frustrated Canadian traders are forced to execute orders in New York. TSE hopes to eliminate its recurring computer problems by September.

OCT. 25, 2000: Frantic dumping of shares in Nortel Networks overloads the TSE's computer system, forcing the exchange to halt trading in Nortel. Canadian traders are forced to trade Nortel on the NYSE.

Source: Bloomberg News, Kaqan McLeod, National Post

http://www.nationalpost.com/financialpost/cadbusiness/story.html?f=/stories/20001027/442392.html

-- Martin Thompson (mthom1927@aol.com), October 27, 2000