A centralized quotation system is currently available—the Intermarket Trading System (ITS), developed by the American, Boston, Chicago, New York, Pacific, and Philadelphia Stock Exchanges and the NASD.
ITS consists of a central computer facility with interconnected terminals in the participating market centers. The number of issues included, the volume of trading, and the size of trades have all grown substantially.
With ITS, brokers and market makers in each market center indicate specific buying and selling commitments through a composite quotation display that shows the current quotes for each stock in every market center. A broker is expected to go to the best market to execute a customer’s order by sending a message committing to a buy or sell at the price quoted.
When this commitment is accepted, a message reports the transaction. The following example illustrates how ITS works.
A broker on the NYSE has a market order to sell 100 shares of GE stock. Assuming the quotation display at the NYSE shows that the best current bid for GE is on the Pacific Stock Exchange (CSE), the broker will enter an order to sell 100 shares at the bid on the PSE.
Within seconds, the commitment flashes on the computer screen and is printed out at the PSE specialist’s post where it is executed against the PSE bid. The transaction is reported back to New York and on the consolidated tape.
Both brokers receive immediate confirmation, and the results are transmitted at the end of each day. Thereafter, each broker completes his or her own clearance and settlement procedure.
The ITS system currently provides centralized quotations for stocks listed on the NYSE and specifies whether a bid or ask away from the NYSE market is superior to that on the NYSE.
Note, however, that the system lacks several characteristics. It does not automatically execute at the best market. Instead, you must contact the market maker and indicate that you want to buy or sell, at which time the bid or ask may be withdrawn.
Also, it is not mandatory that a broker go to the best market. Although the best price may be at another market center, a broker might consider it inconvenient to trade on that exchange if the price difference is not substantial.
It is almost impossible to audit such actions. Still, even with these shortcomings, substantial technical and operational progress has occurred on a central quotation system.
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