offices is returned to the member firm's booth on the floor where clerks re-enter much of it again as execution reports to both the buying broker and the selling broker. Later the same information is re-entered back into the system through punched cards or exchange tickets prepared for the clearing corporations. Still later there may be a fail clearance and the data must again be entered into the system.

Another difficulty in the present floor trade system is that not all trades executed on the floor are compared. In fact, there is a DK ("Don't Know") rate of some 10 percent which must be resolved. The transaction may not go through clearing due to a lack of match between the broker data from the opposite sides of the trades.

On the trading floors some orders are currently handled via pneumatic tube systems. Using the AMEX tube system as a means of distribution, it is necessary to open containers, examine the contents, re-insert them into the containers, and reroute to the proper post locations. Then upon execution by the specialist, a copy of the completed trade ticket is re-sent through the tubes to the broker's booth. This is basically a slow process and is highly subject to errors, and to mis-routing.

At NYSE the tube system does not require intermediate container handling. A problem exists, however, in that execution reports from specialists do not include the brokers' transaction number to assist in order matching.

In the present system, the manual execution of odd lot and much of the limit order trading results in unnecessary specialist effort and unnecessary floor facilities, such as teletype equipment, booth and post space. Because these trades are executed by an essentially clerical process which must operate within rigidly prescribed rules, many of the errors that are made in this process are clearly avoidable.

Recommendation

North American Rockwell recommends the design and implementation of a Floor Trade Reporting System at AMEX. This system will provide for the entry of all trade data necessary to process the trade as soon as the execution takes place. With both sides of the trade entered together, the compared trade will:

• Be sent to the ticker system,

• Update the electronic post display,

• Provide records for compliance and stock watch activities,

• Transmit price to the odd-lot POLE system,

• Distribute execution reports to the principals, and

• Be submitted to the clearing operation.

Secondly, it is recommended that the AMEX' Programmed Odd-Lot Execution (POLE) program be implemented in conjunction with the Floor Trade Reporting System. Thirdly, it is recommended-as the AMEX plans-that the computerized system for automatic order execution be expanded after experience with the POLE system is obtained, to handle limit orders and to aid in the execution of single round lot orders.

Order Input In Recommended System

As shown in Figure 4, page 26, when an order comes through the computer switch at the broker's home office, it is subjected to an order edit. It is then switched to the appropriate trading location. One route takes it to the AMEX switching computer where it is

sent either to an automated order execution program within a computer, or is routed by the computer to an output device on the floor of the Exchange. This device is dedicated to a particular floor broker. The output device produces an order ticket which is readable by both man and machine.

The Order Ticket

There are several ways of producing and reading these tickets. One of the most promising would have separate man and machine readable characters produced by a teletype or similar printer. An example of this type of order ticket is shown in Figure 5, page 27. The bars contain a binary code which is decipherable by computer. The top line is a synchronous channel and the bottom two lines contain data and parity checks. In the example shown there is sufficient code area to indicate:

The brokers on both sides of the trade make the trade exactly as at present. In the simplest case each broker enters on his ticket the price of the trade and opposite-side broker identification, and both tickets are handed to an Exchange reporter at the same time.

The reporter relays both order tickets to a computer terminal inside the trading post. The tickets are read by the terminal and the price is entered. This may be either by a keyboard at the terminal or by a mark-sense annotation of the ticket by a clerk.

The orders and the execution price enter the Exchange computer where an edit is performed. The computer checks to see that both orders are for the same security, that one side was a buy and the other a sell, and that the quantities and prices match. At this point, there would be either an on-line distribution of the report or reject back to the clerk.

Trade reporting becomes somewhat more complicated when there are two buy brokers and one sell broker. If the two trades take place at the same time, all three order tickets are handed to the reporter at the same time and the three tickets are entered into the computer. The trades are reported as required. The ticker gets the results of the two trades and each of the three brokers gets the information on the part of the trade in which he participated. If a $2 broker is involved, he also gets a report of the trade covering his participation.

If a specialist or registered trader is principal on one side there will be a one ticket order report with a provision for indicating who assumed the other side of the trade as principal. The specialist may stamp his acceptance as he presently does for cancel order receipts.

Another illustration of system consideration would be when the trade results in a partial fill on one side. The following steps would be taken to capture the transaction:

• The broker who has completed his side of the trade passes his annotated ticket to the waiting reporter.

The partially filled broker annotates his original ticket as he presently does but gives it to the reporter only when it is complete. He does, however, submit an execution ticket or floor report which is the same size as the machine produced order. His identification will be preprinted in both man and machine readable form. The broker adds the following information:

-Buy or Sell

-Security Symbol

-Quantity

-Price

-Name given up by contra broker

-Firm's order number

• The data-entry clerk keys-in this additional information.

• He visually verifies the data, places the execution ticket into the read mechanism and depresses the transmit key.

• The computer verifies this information and distributes it as in the case of a completed trade.

67-228 O 72 pt. 4 17

Results

Implementing the floor trade reporting system will result in an accurate timely record of the trade captured at the point of execution.

The new system will provide for rapid resolution of unmatched input. If there were an error, if there are two buys instead of one buy and one sell, if the securities do not match, if the card is entered upside down or out of sequence, the trade will be rejected immediately. The clerk in most cases will be able to resolve the problem himself. If not, it can go immediately to a "Flying Squad" to resolve the difficulty with the brokers before the market has had an extended chance to move away. Certainly there will not be as much opportunity to move in a minute or two as there is in a day or two under the present system.

The new system will provide a complete report of firm trades on trade day. Because the trade is now locked, it can go directly into the accounting systems in each of the member houses to be used as a forecast of certificate and dollar movements for up to a week ahead. This provides the opportunity for a much tighter control over the cage systems and a much more efficient planning for certificate and dollar flow.

Because trades are compared and matched before leaving the Exchange, there will no longer be a requirement for a member firm Purchase and Sales (P&S) Department to handle listed securities. DK's will be resolved during and by the end of trade day. This will eliminate the Supplemental Contract List and will permit Contract Lists and Balance Orders, shown on Figure 6, page 30, to be available at the beginning of trade day plus one (T +1), or two days earlier than at present. This allows the brokerage firms to free up clerical personnel and needed floor space for other applications.

As the system is planned, Exchange computers will be used during the trading day for order switching, order editing, and automatic order execution. Shortly after the close, the computers will be switched to clearing trade reports which have been stored throughout the day. Because all of the necessary information is present, probably on magnetic tape, the clearing process, including netting and allocation, should be complete within a few hours after the close of the Exchange. A record of the trade will thus be available to the member firms on the evening of trade date.

This system would be the first link in the step towards automatic settlement. As shown in Figure 4, the trade report information could eventually go directly to a clearing service on settlement date. There can be a trade-by-trade settlement completed automatically without any additional input by the brokers if they have the necessary dollars and necessary securities in their account. This type of settlement is described further in Chapter 5.

Order Match

Considerable effort is being exerted by member firms to devise order match programs to match the order as received from the branch office with the report of the trade as it is received from the floor. Today, this is generally a manual process, complicated by the fact that not all orders coming back from the Exchanges have the original order number on them.

When the original order number is missing, parameter matches must be made. In other words, orders will be matched when they are for the same security, the same number of shares and the same conditions of trade. But open orders may not be executed in the same sequence as they are received. Furthermore, the report of the trade coming back from the floor via teletype generally does not list the contra broker. Therefore, an additional step is required to get the contra broker information from the trade tickets and enter it into the