Keeping PACE with oldest stock exchange in the United States
Nicholas A. Giordano paused in midsentence and stared panic-stricken out the window of his office in the Philadelphia Stock Exchange. ''The lights just flickered in the office across the atrium,'' Mr. Giordano explained anxiously to his visitor and then resumed his conversation, still glancing every few seconds across the way.
What worried the president of PHLX -- as the nation's oldest and fifth-largest stock exchange is dubbed -- was that the momentary blackout came from the room that houses the $5 million computer system, the floor brokers' lifeblood. Since moving the complicated hardware into their ultramodern new offices on Market and 19th Streets last July, exchange officials have been understandably jittery about such critical factors as power sources and backup systems.
In fact, the exchange may rely on computers for trading activities more heavily than any of the seven other exchanges around the country. Its unique, computer-driven PACE system, inaugurated in 1977, automatically targets a stock on both the New York Stock Exchange and PHLX, then finds and locks in the better price of the two listings and instantly executes and reports the order.
Today, roughly 2,000 orders a day, or more than half of PHLX's equity trades, are generated through the PACE system. A much smaller share of its equity orders -- one floor spokesman's estimate is about 150 daily -- comes from the Intermarket Trading System (ITS), a computerized communications link among all the exchanges that was mandated a few years ago by the Securities and Exchange Commission.
Indeed, PACE has proved to be such a master stroke that the Philadelphia exchange plans to increase its capacity to include all the exchanges in its price comparisons and to cover higher share limits per order. (Those ceilings will still be far lower than the round lots traded under ITS.) ''We could expand the number of PACE users to 25 more brokerage firms -- up from the current 25 -- by year-end,'' Giordano says. ''Though it's only an adjunct to our regular trading, PACE is clearly beginning to look like a primary source of our business.''
PHLX, uniquely aggressive on the technological front, has pulled out even more stops in developing another adjunct -- stock options.
As one of the four exchanges that began offering primary options contracts when trading in puts and calls was first permitted in 1975, PHLX has since beefed up its exclusive listings to 62 United States and Canadian stocks. Not only has the number of available options expanded rapidly, but the volume of options contracts PHLX trades has shot up from fewer than 140,000 the first year to 10 million in 1981. And that could rise another 50 percent, to 15 million contracts, within two years, Giordano estimates.
Not surprisingly, options trading has become a hot item in today's volatile markets, putting PHLX -- once a barely known ''regional'' exchange -- on the national map. Though it ranks considerably lower than the Chicago Board of Options and the American Stock Exchange in volume of contracts and number of trades executed, PHLX's success in options has boosted its market share of all equity and options transactions to more than 7 percent of total trades on all eight exchanges -- just about double its share of three years ago, Giordano says. A 7 percent share may sound insignificant, but for a small exchange in the shadow of New York, it's nothing to sniff at, he says.
The Philadelphia exchange plans to carve out other niches in the securities industry. Since most of its competitors weren't expressing much interest in foreign currency options, PHLX decided 18 months ago to try its hand.
Giordano expects trading to start early in the second half of this year, should a jurisdictional tangle between two federal regulatory agencies be resolved by then.
He hopes to sign up between 200 and 300 members on the exchange floor and another 200 upstairs. Seats, or ''participations,'' in foreign currency options trading will be open to both existing exchange members and non-members. In the latter category, likely candidates are banks, which are already big players in the physical currency markets. The end result, Mr. Girodano suspects, is that the new options offshoot will be ''bigger than anything we've seen.''
PHLX officials hope that their entry into these newfangled markets, as well as their magnificent new building, will add a measure of class and credibility to their operations -- something that the exchange has lacked for most of its 192-year history. One sign of its increased clout was the gala black-tie reception and dinner that the exchange held last month to officially celebrate its new quarters.
But perhaps the real indication of having ''made it'' will come when PHLX is ''no longer called a 'regional' exchange,'' Mr. Giordano insists. ''I don't subscribe to that tag. Our business comes more and more from the national brokerage community.''