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Why the NYSE flip-flopped on electronic trading

October 29, 2012: 3:02 PM ET

Hurricane Sandy closed the markets but some on Wall Street say it didn't have to.

FORTUNE -- Stock market traders nearly had to work through Hurricane Sandy.

All day Sunday, the New York Stock Exchange said that while the exchange's floor would be closed, stock trading would go on, electronically. It was a stark contrast from a little over a decade ago, when then NYSE CEO Dick Grasso basically bullied the NASDAQ and other electronic trading venues to stay closed in the wake of 9/11 when they probably could have re-opened on their own. This time the NYSE seemed determined to prove that more than a decade of planning and the construction of a fortified facility in Mahwah, New Jersey, had been worth it.

Then nothing. The market was closed on Monday for all trading, and it will stay closed on Tuesday.

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It's not exactly clear why. We won't know now, but trading experts seem convinced that the market could have functioned normally with the actual exchange closed on Monday. "Stock trading could absolutely be operating right now," says Adam Sussman of market technology consulting firm TABB Group. "I'm kind of surprised they decided not to trade electronically."

On Sunday at 6 P.M., officials from the NYSE, the Nasdaq and other exchanges held a conference call with the heads of trading at the major Wall Street firms. Reportedly, the Wall Street firms said they couldn't be ready on short notice, and were concerned about the well-being of their employees who would have to travel. The Securities and Exchange Commission probably applied some pressure as well. Still, it took another four hours or so for stock trading to officially be called off.

But that didn't stop the Wall Street firms from having their bond traders come in. An equity derivatives trader at Credit Suisse said there were about 10 people in the office on Monday on the firm's equity trading floor out of a normal 600. Debt traders were mostly in the office.

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And when creating a list for contingency planning, you have to think that at least one of those Harvard MBAs would have thought to include hurricanes. What's more, market technology experts say that a number of Wall Street firms have the capacity to allow their traders to buy and sell stocks over the firm's networks from home.

Another data point: The NYSE's head of stock trading execution is based in Chicago. So even on a clear day he's not in New York, and on most days that seems to work out fine.

In the past half decade or so, stock trading has been moving away from the NYSE. About 40% of stock trades never pass through the exchange. A good percentage of the rest are completed elsewhere, crossed in the computer systems of brokerage firms, or other competing electronic trading venues, but are routed through the NYSE's system, so they get counted. Nonetheless, what the last few years have proven is that others can do stock trading just as efficiently as the NYSE.

You can argue that the recent increase in stock trading glitches is a result of this movement away from the NYSE. But Knight's recent trading disaster happened in NYSE stocks, so it's not like the NYSE is doing a better job of stopping trading glitches. And while some may wish it, we are never going back to system where all stocks are traded face-to-face.

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The one competitive advantage, though, the NYSE still has is the actual trading floor. It's not that big of an advantage, but it's something. "The NYSE is mainly a TV studio these days," says Christopher Nagy, who heads up consulting firm KOR Trading.

And even if the NYSE is desperate to prove that it can compete in the new era of trading, a number of other market participants are investing in keeping things the way they are. A further fracturing of the market probably would benefit upstart high-frequency trading firms more than Morgan Stanley or Goldman Sachs. The SEC, too, which is already woefully behind in policing electronic markets, doesn't want whatever grasp on the market the NYSE still has, to fade away.

Still, the NYSE was willing to make the bet that proving it could operate fully electronically would be a better boon for its business than maintaining the mystique that the floor gives it some advantage. Other Wall Street's power players and regulators weren't willing to make that bet.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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