As chief technology officer for the
American Stock Exchange
, Ravi Apte oversees a complex network of stocks,
options and exchange-traded funds, or ETFs, for which prices and statistics pulse through the Amex's IT system at the rate of more than 7,800 quotes per second.
Here, Apte explains how it all comes together and how the exchange dealt with the crippling blow of Sept. 11 when it was forced to operate out of the New York and Philadelphia Stock exchanges for two weeks.
TSC: How was the American Stock Exchange able to continue trading in the days following the Sept. 11 attack on the World Trade Center? Why were you more heavily impacted over here, on Rector Street, than the New York Stock Exchange two blocks away on Wall Street? And given how seriously you were impacted, how were you able to return to your trading floor a mere three weeks later on Oct. 1?
We were operating out of the New York Stock Exchange for equities, which was very gracious of them, and out of the Philadelphia Stock Exchange for options and derivatives, for two weeks.
You have to understand that our floor is here. The floor was out of commission because we are so close to Ground Zero.
We have two data centers away from the floor. The same two data centers support the New York Stock Exchange as well as us. There is one in New York and one in Brooklyn. So they are redundant.
Those data centers were completely unaffected. So we can change our location to anywhere -- to the NYSE or the PHX. The data centers continued. We just don't have a redundant floor. Nobody, no major or regional stock exchange, has a redundant floor, as far as I know.
Obviously, you cannot duplicate the 800 members.
Laughs. I don't think they are duplicable.
But we also have hundreds of firms that have connections to us. We have people on the floor who might use the phone or be connected to the back office. All of these circuits -- hundreds and hundreds of circuits -- are being supplied by
and other companies from 7 World Trade Center, which suffered a major hit.
And so a lot of effort was spent, even when we came back here on Oct. 1, to ensure that these data centers and phone circuits were fully up so that our members could communicate with their own staff on the floor.
Our own connections to the data centers are completely redundant, and they are fiber-channel that go under the river to Brooklyn and all, and they were completely unaffected because they were not going through this building. In addition, they have alternative routing paths, so they are fully and completely redundant.
Also, in the building, there was a significant amount of cleanup to do. The ducting and the air conditioning and the power and, obviously, at that time, we had lost Con Edison and the phones were not working, so it was the
complete infrastructure. Just to turn on the air conditioning was a task. We couldn't turn it on until we got steam, because the steam pipes had been obliterated, so we had to get steam boilers out in front. But then we didn't have any water. So as you can see, it went on and on.
But from a systems perspective, we were rock solid because we had the two redundant data centers.
TSC: Out of this disaster, are there any upgrades happening to make the IT infrastructure at the American Stock Exchange safer, securer, faster or more competitive vis-¿-vis the other exchanges against which you vie for business, such as the Big Board?
There is an awareness that we have to have "un-eliminating" points of failure. So if you have a concentration of all of our phone lines and circuits in the Verizon building across the street, you are going to have to figure out a way to have this from two data centers. That is an important lesson. We haven't reached that point.
Whatever upgrades we now have are a temporary phenomenon, but I don't think many of them are permanent. Verizon may have just laid down an additional 33 miles of fiber optics in the days immediately following Sept. 11, and if you walked across the street you have seen that this entire Rector Street
has been dug up. That's just on the street-level surface. So, that cannot be a permanent fixture.
Yes, clearly, some new infrastructure will be laid, but it is not the infrastructure that failed in this case. It's just that the buildings collapsed.
In terms of the American Stock Exchange, it is very interesting from a technology perspective. One of the things we are trying to do is go to real-time trading and to eliminate the various heterogeneous vendors that we use -- to simplify our technology in the face of the complexity that we face.
TSC: Are there any big financial IT initiatives here at the American Stock Exchange that would impact and be of interest to the individual investor?
There's a lot going on from an investor's perspective. First of all, we offer threedifferent, distinct product lines. We have approximately 900 listed companies, which are primarily small-and mid-cap companies. That presents an opportunity to investors who are looking for small- and medium-capcompanies in the technology, real estate, biotechnology, oil exploration and a host of other industries.
The second is, we are probably the second-largest options exchange in the world. We have 1,600-plus options classes. So, if your readers, particularly the more sophisticated investors, wanted to hedge their portfolios, then we offer atremendous number of options
for any product you can name, whether it's a tech stock or a Big Board stock.
The third product, which I think is particularly interesting to the investor community, is the exchange-traded fund ETF.We are the inventors of this product, and, you know, imitation is the best form of flattery. There isanother exchange on the other side of the street
the New York Stock Exchange which just startedtrading
three of our listed ETFs: the QQQs
based on the Nasdaq 100, the Spiders
based on theS&P 500 and the Diamonds
based on the Dow Jones Industrial Average.
And I am happy to tell you that we continue to maintain our lead share in those ETFs. But we already have more than 100 different ETFs.
With an ETF, you can really pick and choose and spread your risk among various indexes -- at very competitive fees -- all while meeting your precise asset-allocation requirements.
TSC: Why would an investor want to buy, or instruct their broker/dealer to buy, one of these ETFs through the American Stock Exchange rather than the New York Stock Exchange? Are there any differences in your technologies, for instance, that would make a difference in price or liquidity?
Well, some technology, and there's also a very important aspect of liquidity. Why would an investor come to an exchange? Actually, an investor never comes to an exchange. They come through their broker/dealer. It could be Charles Schwab. It could be Merrill Lynch. And they make the decision.
Now, why would an institution come to us? There are many reasons. The first one is liquidity. They may think, "Here is a place where I can always get a very good, robust, liquid market where, if I want to buy something, there is product to buy, and if I want to sell something, there is always somebody ready to buy.
With liquidity, you can get price improvement through the dominant specialist who controls the stock or the instrument. If you wanted to buy 10,000 shares of QQQ, you give it to a broker on the floor here, he walks into the crowd and negotiates a good price, and you get price improvement over what is known as the NBBO, or national best bid and offer.
You might come to an exchange because you get speed of execution: The market is moving rapidly and you don't want to take a minute to execute your trade. You want instant execution. That is where technology comes into the picture. How soon can you bring your order into the exchange? How soon does it get executed? And how soon do you know that it got filled?
And then, there is a very pernicious practice in the industry, which is, hopefully, dying out, which is called payment for order flow. A number of exchanges are paying for order flow and, hopefully, that will die out. Again, it tempts the order providers to route the order to that exchange which gives them the most payment for order flow.
TSC: What are some of the big information technology initiatives that you are working on here at the American Stock Exchange, particularly ones that would be of interest to the individual investor?
As I said, our objective is to provide extremely rapid execution in a rapid environment where there is always robust order flow -- where you could provide as many limit orders or other special trade instructions as you desire.
TSC: What are some of the other big financial IT initiatives here?
Actually, right now, a lot is going on in all of these areas ... and we are coping with tremendously higher capacity that is being thrown at us in the options area. There is a significant capacity increase particularly with respect to quotations and the rates at which quotations are being calculated.
Let's understand this for a minute. Every time the underlying equity changes, which in a stock market is instantaneous and constant,
of the derivative options products linked to the underlying equity change as well.
So, for example, if the strike price for
were to change, all of the options -- and there are probably several hundred options for Microsoft alone for near months and for time periods beyond -- all of these would immediately change their price.
TSC: This happens all of the time...
Absolutely. It happens every second. And as a result of that, all of the options that are based on Microsoft's underlying price change their price immediately.
If you look at the other exchanges, perhaps on average they each list 8,000 stocks. We trade options on 1,600 listed and
stocks. Overall, between all of these stocks, we have more than 100,000 option combinations.
Let's say a stock is trading at $50. We might have options all the way from $20 to $100. So there are hundreds and hundreds of options for each underlying class on each of the stocks.
And each time an underlying price changes, all of these prices change for us and for all of the five options exchanges: the Chicago Board Options Exchange, the International Securities Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange. So on any given day, we have message traffic of about 7,800 quotes per second.
TSC: Let's see. That works out to about 468,000 quotes per minute and somewhere in the range of 28 million quotes an hour. So for a 6 1/2-hour trading day, you're talking about roughly 200 million price quotes each trading day at the Amex. Did we get that right?
Well, it's a lot, OK? You can barely see the stuff. And our systems have to be geared up to receive this huge intake of quotes. At the same time we are receiving the quotes, we have to continuously compute every
strike price, what is the national best bid and offer and in so doing, offer the best price to our customers and in turn the individual investor.
TSC: What systems do you use, in terms of operating system, hardware, software and, most importantly, your central database?
Hundreds and hundreds of different systems. But the major database supplier is
, but we do use
and a number of other databases