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Brokers eye NYSE alternative
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June 8, 1999: 1:02 p.m. ET
Merrill, Goldman collaborate with Madoff Securities on new electronic system
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NEW YORK (CNNfn) - Two of Wall Street's biggest brokerages are throwing their weight behind a new electronic trading system that ultimately may compete for buy and sell orders with the New York Stock Exchange.
Peter Madoff, a senior managing director with New York's Bernard L. Madoff Investment Securities, said Goldman Sachs Group Inc. and Merrill Lynch & Co. have agreed to help his company develop Primex Trading N.A., a broad-based trading system allowing brokers anywhere in the country to trade securities electronically.
Unlike previous trading systems that have tried to compete against Wall Street's Big Board, Primex will offer an auction, or price improvement, format -- which the New York Stock Exchange long has claimed improves the prices investors sell and buy stocks for -- that isn't constrained by geographic boundaries.
NYSE's Big Board, competing regional exchange specialists and independent dealers all currently offer auction formats, or the ability to give investors a price better than the best bid or offer. But Madoff said Primex will be the first format that doesn't require brokers to be physically in the room to take advantage of the auction format, since all trading will occur electronically.
"The plan was to come up with a system that would be an open platform and improve the liquidity to customers," Madoff said. "It was our belief that you could improve liquidity by improving the [size of the] crowd."
The NYSE's opening bell may not be so joyous if a new electronic exchange takes off
The extent of Merrill's and Goldman's participation isn't yet known, although one source with knowledge of the negotiations said neither party has made a firm commitment as to what their involvement will be once the system is active.
Both Merrill and Goldman traditionally have been extremely loyal to the New York Stock Exchange, funneling almost all of their orders through the Big Board.
Goldman declined to comment on its participation in Primex, but a Merrill spokesman said his company, while pleased with the NYSE's current auction format, is simply exploring what could become the next evolution in trading.
"The financial markets are expanding very rapidly and we're always looking at the avenues that have the potential to achieve a critical mass and make things easier for our customers," said Jonathan Humphreys, a Merrill spokesman.
Madoff said the new system will be open to broker/dealers, institutions and individual investors, although only registered broker/dealers will be able to conduct trades. The parties hope to have Primex up and running by the second quarter of next year, just before all markets convert to using decimals instead of fractions in pricing stocks.
Price improvement allows brokers to compete for an offer to purchase by reducing or raising the price.
In other words, when an investor makes an offer to buy a security for, say, $10 a share, then floor traders can bid to buy that same share for more than that $10.
Primex will duplicate this auction function electronically, while also allowing brokers to utilize electronic communications networks, a popular trading practice on the Nasdaq board, to load predetermined prices into their system.
For instance, if you wanted to buy a stock and were willing to pay $10.50 for it, as soon as the stock came up for that price, your electronic order would be first in line to purchase shares. If no predetermined orders were placed for the shares at a given price, sales would be made on a first come, first serve basis, Madoff said.
Primex intends to attach its system to an existing stock exchange, but Madoff said it is "premature" to divulge which exchanges it is having discussions with.
However, one source said the New York Stock Exchange has been approached and could potentially welcome the new trading system with open arms rather than competing with it when it goes online next year. 
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