Stock trading changed since 9/11

Associated Press

NEW YORK

In the decade since the Sept. 11 attacks, lower Manhattan has been transformed. Once the physical financial center of the country, the area has become an upscale residential neighborhood.

The transformation of Wall Street results in part from the terrorist attacks, but it also reflects sweeping changes in the structure of the stock market.

“If you just looked at the Dow, you’d think that nothing much had changed over the past 10 years, but nothing could be further from the truth,” says Louis Pastina, head of trading- floor operations at the New York Stock Exchange.

In early September 2001, the Dow Jones industrial average had just fallen below 10,000. Much of the financial data that powered the stock exchange flowed through servers in a Verizon building by the World Trade Center complex.

That building sustained no damage when the twin towers fell, and trading resumed Sept. 17. But the exchange’s home was considered a target. The visitor center was closed, and the cables and wires that fed the exchange were rerouted.

But the biggest change came in 2005, when the Securities and Exchange Commission extended a rule that required brokers to fill customer orders at the best available price. Before then, brokers just had to find the best price at the New York Stock Exchange.

The new rule led to faster trading speeds as additional exchanges competed to fill each order. In the simplest explanation, an investor who wanted to buy 300 shares of General Electric at the market price before this rule change might have seen his order go unfilled for minutes or longer because of its small size. It would be lumped with other orders for GE shares until the total rose to, say, 10,000 shares. Then the aggregate order would be filled, regardless of how much the stock’s price fluctuated in the meantime.

The cost of each stock transaction soon plummeted from an estimated average of a few cents in 2001 to less than 0.03 cents in the first three months of this year. Another result of change was a wave of consolidation among exchange operators that includes the purchase this year of NYSE Euronext, the company behind the New York Stock exchange, by a German company called Deutsche Borse.

Lower costs, in turn, let high-frequency trading take hold. High-frequency trading made daily volumes soar because big investors could easily trade huge numbers of shares at a very low cost. An average of 1.2 billion shares traded daily on the New York Stock Exchange in 2001. This year, 4.3 billion shares have changed hands each day on average, according to data provider FactSet.

The SEC adopted so-called circuit breakers that halt trading if prices on any of the 500 stocks in the Standard and Poor’s 500 index or the 1,000 stocks in the Russell 1000 index move 10 percent or more in five minutes.

Circuit breakers were also put in place for the most heavily-traded exchange traded funds, a class of mutual fund known as an ETF that trades all day like a stock. For individual investors, the growing popularity of ETFs may be the biggest change since Sept. 11.