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NYSE Moves to Real-Time Trade Clearing

The New York Stock Exchange has taken another step toward real-time processing by ridding itself of a decades-old process of batching trades and sending them to be cleared at the end of the day.

A new system, called the On-Line Comparison System (OCS) now sends equities trades to the exchange's clearing system as they are made. The upgrade puts the NYSE one step closer to adopting straight-through-processing, the financial system's long-running goal of clearing trades in real-time.

NYSE Vice President Louis Pastina said the OCS allows all NYSE system equity orders to be entered, executed, reported and compared in real-time and then sent immediately to its clearing agent, the National Securities Clearing Corporation (NSCC).

It also moves the exchange a step closer to its goal of settling trades within a day, called T+1, the next step before straight-through, or real-time processing is adopted. Right now, most of the financial world is in so-called T+3 mode, meaning a trade made on a Friday must be settled by the following Wednesday.

"With the way trading is moving today and this whole notion of straight-through processing, you really can't be in a batch mode anymore," Pastina said. "So we moved in mini-steps where we would get the data over in batches during the day, to finally what we're doing today to sending real-time messages."

Before the new system was put into full operation, the trades were rounded up in intra-day batches (much like banks clear all account activity in once-a-day batch files), and then sent to the clearing system.

Although one might expect that the upgrade would demand greater server and processing power, Pastina said it actually reduced the demands on the IBM mainframe the system uses to run trades because now it doesn't have to park so much trade data in one place before sending it on to a clearing system. It did call for more database power and new standardized business messaging protocols, he said.

"It was important to put this in place. In order to get trade data resolved the next day, you have to get to the next step toward that as quickly as possible."

As U.S. Equities trades flow through the NYSE, they then go to the The National Securities Clearing Corporation (NSCC). The bank utility system acts as a clearing agent once U.S.-listed equities change hands, essentially making sure deals are actually done the way they were traded. It is a subsidiary of The Depository Trust Company, a trust company that is a member of the U.S. Federal Reserve System.

The new On-Line Comparison System project actually began in 2000. When it recently went into full operation, it was the first comparison system at an exchange to connect real-time to the NSCC on a message-by-message basis for trades generated by the trading floor crowd, the NYSE said.

Now, as soon as an order is executed, the NYSE's systems instantly compare the data related to both sides of the trade - initiator and counter-party, Pastina said. "Within seconds, the data are compared and submitted on a message-by-message basis for clearance."

Pastina said the new system is also a reflection of the increased planning in the financial industry to build more distributed networks after the NYSE and U.S. markets were closed for four days following the Sept. 11 terrorist attacks.

"When you're in messaging environment, and in a disaster, it's nice to know you're not holding onto a huge batch of data and haven't passed it on to the next location."

It also helps traders and exchange customers achieve a better view of their financial positions and manage their exposure once they know which trades have matched up and moved to the clearing process.

On an average day, about 1.43 billion shares with an estimated value of $42 billion trade on the NYSE.