Once upon a time, hot tips controlled the Street. Now
As electronic trading platforms such as
volume, brokers are trying to link directly to them in an effort to bypass the finicky Internet. But they're finding telecommunications problems have littered the path with the most old-fashioned of obstacles.
Nowhere is that clearer than in the nascent after-hours market, where liquidity remains thin, making it tougher for investors to find good prices. In order for after-hours trading to build volume, it needs more participants, and that's where the telecom connections come in.
The alternative trading systems that offer after-hours trading are basically building new stock exchanges, meaning they need the infrastructure that will guarantee brokers uninterrupted access. That comes in form of direct connections such as T1 lines. Without that access, the brokers may have little interest in sending along orders in great quantities.
Take MarketXT. The start-up after-hours trading system was launched in late August with only a few brokers sending order flow, mainly
Morgan Stanley Dean Witter Online
, previously called
. Since then, MarketXT has signed up new brokerages every week, says Eugene Choe, MarketXT's co-founder. Among them are
, the electronic brokerage unit of
Timber Hill Group
. But then comes the tough part -- actually connecting companies such as Interactive Brokers through direct lines to MarketXT.
"It takes a long time to get the telephone companies to put in lines. Part of that is because they are busy. Everyone is trying to get hooked up with everyone else," Choe says. "I understand the workload, but it takes six to eight weeks."
The delay seems to be taking its toll. MarketXT's after-hours volume has been increasing according to the company, but it's nowhere near that of Island, which already had in place connections to more than 200 subscribers. Even though Island only began after-hours trading a few weeks before MarketXT, it had been up and running during the regular day for several years. For example, in the 4 p.m. to 8 p.m. session Monday, Island's top 10 most-active stocks traded 3.3 million shares compared with MarketXT's 7,675 shares.
In the increasingly competitive after-hours trading market that MarketXT specializes in, being able to move quickly is critical. It wasn't a telecom problem that kept
from launching its after-hours trading site on Nov. 1, but its failure to establish a position early had serious consequences. As the company waited, the competitive landscape changed and last week Wit decided to shelve its plans. One of the reasons was the expected entry of the stock exchanges in this arena sometime next year.
In getting hooked up to the high-speed lines that have the bandwidth needed to carry bulky and sensitive data, these trading systems face competition from just about every business.
"Demand for high-speed circuits all around has grown as demand for the Internet has exploded," explains Bob Wilkes, a telecommunications analyst at
Brown Brothers Harriman
. "Generally speaking, almost anybody you talk to says there's a shortage of bandwidth."
Some of the long-distance phone companies almost agree. Tom Noone, the
product manager for high-speed packet (a type of data) services, says connections take 30 to 45 days to install, depending on the local provider and what's involved. While demand for private T1 lines is hot now, there's a push toward more flexible Internet-type connections, often known as Internet protocol, or IP.
"They're looking for something to evolve to. Customers who choose frame relay
another type of dedicated line, have an evolution path that gets them into an IP in the future," Noone says.
Here's where it really gets complicated. Once a broker signs on with an ECN, either the ECN or the broker-dealer decides on the primary telecom carrier. Executives at some of the larger systems, such as
and Island, say they'll set up a backup system, usually through another telecom carrier.
Even so, online brokers aren't the only ones who worry about keeping connections up -- most ECNs demand 99.9% performance from their long-distance provider. Once the long-distance company is chosen, such as AT&T,
(which has agreed to be acquired by MCI WorldCom), the real battle begins -- getting the local telco to hook up the final piece.
On Wall Street, that's Bell Atlantic. If there's already a line running into the office, the process can be quick and painless. But if the line's not in the right place, or if it isn't there at all, the wait gets longer. Access to some buildings' lines can be in the building next door or down the street, the story goes. Or it can be weeks to make an appointment. Bell Atlantic didn't return phone calls requesting comment.
So, when it comes to building the new Wall Street's infrastructure, it turns out there's a lot of old-fashioned bureaucracy. Still, there's no going back to the