Pacific Stock Exchange Still Suffering From Oct. 19 Crash
On Oct. 20, the frenzied day after the stock market crashed, the Pacific Stock Exchange’s computer system also crashed, overloaded by an unprecedented volume of trades.
Today, nearly seven months later, that highly touted order-execution system, called Scorex, is up and better than ever. It now can handle nearly three times more trades than it could before the crash, enough to cope with the heavy volumes seen during the October debacle.
The problem now is keeping the system busy enough.
While all exchanges are suffering from declining volume as wary investors seek safer havens following the crash, the Pacific Stock Exchange’s slippage has been worse than most. That has hurt revenue--the bulk of which is derived from trading volume--while slowing the exchange’s efforts to expand internationally and increase the number of stocks that it trades.
While the exchange, still known for its state-of-the-art computerized systems and technological innovation, is far from any danger of severe financial trouble, its resultant cost-cutting efforts could delay its goal of becoming the nation’s pre-eminent regional exchange.
“We don’t have the exuberance we had before,” says the exchange’s chairman and chief executive, Maurice Mann, who took those posts early last year and quickly vowed to boost the exchange’s efficiency and expand its share of trading nationwide. “Business is just tougher.”
While average daily volume through the first four months of 1988 fell only 6% on the New York Stock Exchange and 15.6% on the over-the-counter market, the PSE’s volume is off 27%, compared to the same period last year. Among the nation’s four largest stock exchanges, that fall is exceeded only by the American Stock Exchange, which is off 28.3%.
Volume at the PSE’s options floor in San Francisco also is off sharply, down 25.1%, although that is not as severe as the slide at the giant Chicago Board Options Exchange, where volume is down about 50%.
Several factors account for the Pacific’s worse-than-average slowdown in stock trading volume, Mann says. First, the breakdown of the Scorex automated system drove some brokerages to trade more elsewhere, although they are coming back now that the system has been improved. The system guarantees traders that their orders will be executed at the best available price within 15 seconds.
Second, lower trading volume nationwide generally means the NYSE will get a greater share of trades, as it is more convenient to route trades to one exchange when it’s not too busy. Brokerages generally divert more trades to smaller regional exchanges to seek quicker execution when trading is heavy on the Big Board.
Individuals on Sidelines
Also, the Pacific--which has equity trading floors in Los Angeles and San Francisco--specializes in handling smaller trades of individual investors rather than big block trades of giant institutions. That accounts for why the PSE has ranked second nationwide after the NYSE for total number of equity trades, although it ranks only fourth in total volume.
But many individual investors are on the sidelines these days, wary of another market plunge or of gyrations in stock prices caused by computerized program trading. Transactions by institutions related to takeovers or dividend maneuvers--also not the PSE’s forte--account for a greater share of volume, further hurting the PSE.
“Institutions are dominating the business,” Mann says.
Such institutional dominance accounts in part for why the Midwest Stock Exchange in Chicago, a regional exchange that specializes in block trades, has seen its volume decline by only 13.6% so far this year.
Overall, equity volume at the PSE averaged 6.4 million shares daily in the first four months of this year, down from 8.8 million in the year-ago period and 7.3 million in the same period in 1986.
At the NYSE, average volume fell in the same period to 174.72 million shares daily from 185.81 million in the year-ago period. Amex volume declined to 10.72 million shares daily from 14.96 million a year ago, while volume on the NASDAQ system of over-the-counter trading slipped to about 128 million shares daily from about 152 million.
Options volume at the PSE has shrunk to 54,700 contracts daily, compared to 73,000 for the same period last year.
Adjusted to Slowdown
Brokerage members of the PSE are suffering from the slowdown.
“Our business is quieter than usual,” says Donald Crowell, managing partner of Crowell, Weedon & Co., a Los Angeles brokerage and PSE member.
Many PSE member firms say they have already adjusted to the slowdown, reducing staff on the exchange floor shortly after the October crash.
Gabriel Frlekin, head of equity trading at Coast Options in San Francisco, cut his staff on the exchange’s San Francisco equity floor to eight from 14 before the crash through attrition.
“If things continue to get worse, we’ll look at other ways to cut back,” Frlekin says.
Some floor traders say the exchange should move faster to enact similar cost-cutting measures.
“I don’t feel they are doing everything they should be doing,” said one floor broker. “They should have made moves sooner” to cut expenses and boost revenue.
But exchange officials say they have placed strong emphasis on cost-cutting and other methods to boost efficiency, some of which were initiated even before the crash. For instance, the exchange last year dropped its money-losing clearing and depository operations, which largely handled back-office processing and storage of securities for clients. That eventually will result in the loss of nearly 300 jobs.
“We are looking at everything” as sources of further cost cutting, says Joe Humphrey, the exchange’s director of research.
Special Assessment
Further massive layoffs, however, are not in the cards, officials say. Since the crash and the cuts from closing the clearing and depository operations, the exchange has laid off only a handful of employees, mainly in options, which requires more personal contact and thus is more labor intensive than equity trading, Mann says.
Total employment at the exchange, at 531 at the end of last September, fell to 498 by the end of February and is expected to fall to 480 by the end of June, mostly through attrition, Humphrey says. The work force had totaled about 700 earlier last year, before the closing of the clearing and depository operations.
The exchange also has imposed a special three-month assessment on member firms, in part to make up for the revenue shortfall from the volume slowdown. The exchange, which operates like a cooperative for its member firms, lost $2.2 million last year, largely as a result of charges from shutting down the clearing and depository operations.
Reflecting the slow times, a PSE membership, or seat, most recently went for $57,000, down from a high of about $100,000 before the crash. By contrast, a NYSE seat recently sold for $800,000, down from a high of $1.15 million last year.
Growth in stock listings also has slowed. The PSE gained only 12 new listings in 1988 through April, compared to 25 in the same period last year. By contrast, new NYSE listings are actually up, to 50 through April from 35 in the year-ago period.
Efforts initiated last year by the PSE to explore joint ventures or other links with exchanges in Asia have been put largely on the back burner, although a study exploring opening a third equity trading floor in Honolulu is proceeding and could result in an announcement in the next month or so, Mann says.
“We can’t be as aggressive as before,” he says of reduced efforts to explore joint ventures with Asian exchanges. The slowdown in volume means that the PSE will have to “get our house in order here.” But, “when we get through with that,” Mann vows, “we’ll be a tightly run, streamlined and very efficient operator.”
