Securities and Exchange Commission Historical Society

Transformation & Regulation: Equities Market Structure, 1934 to 2018

Automating the Exchanges, 1976 - 1995


As electronic communications and automated execution systems emerged, the NYSE did not sit still. But it did things differently because it was governed by the floor brokers, floor traders, and specialists who owned it. They were in favor of technological innovation so long as it did not undermine existing arrangements. NYSE members welcomed automation of transaction reporting, for example, in 1966.

William McChesney Martin agreed emphatically. In his 1971 report, he wrote that electronic communications “offer the means to improve radically the way markets operate.” 19 Improvements followed in the 1970s, but all protected the position of the specialist. In 1972 the Commission, in proposed Rule 17a-15, called for every exchange to file a plan for the dissemination of transaction reports in listed securities. In comments to the rule proposal, the NYSE and AMEX suggested instead that a consolidated reporting system be implemented by the Securities Industry Automation Corporation (SIAC), a jointly-owned subsidiary of the NYSE and Amex, to computerize the exchanges. The next year, SIAC began building the Designated Order Turnaround System (DOT) for automatic routing of small orders. The system went in to operation in 1976.

Crowd of enthusiastic floor traders
Floor Traders, Early 1920s

In the mid-1970s, NYSE chairman William (Mil) Batten and vice chairman John Phelan began pushing the exchange to adopt more technology. This was understandable from Batten, an outsider, but as Catherine Kinney put it, it was a bold stance for Phelan “because he was a member, and it was unusual that they would be pushing themselves.” Kinney was hired to help make that happen. 20 But the initiative was not coming solely from within—although the SEC was not willing to dictate, it was applying steady pressure on the NYSE to consider technological alternatives that might eventually integrate it into a national market system.

A way out of this conundrum appeared in 1975 when Pacific Coast Exchange officials initiated a series of clandestine meetings with NYSE officials. Drawing on the SCOREX experience, Bill Lupien suggested using technology to link the NYSE with Pacific Exchange. In subsequent months more regionals got involved. The SEC also participated in the discussions. In April 1978, SIAC delivered the Intermarket Trading System (ITS) which electronically linked the NYSE, the AMEX, and the remaining seven regional exchanges with 60-baud telephone connections and teletype machines. The ITS electronically sent orders, but electronic execution was never an option—paper from the teletype machines went directly to a specialist for execution. “There’s no question we could have done it automated,” recalled Lupien, “they [NYSE] didn’t want to.” 21

It was a big step nevertheless. As NYSE’s Don Calvin explained, “regionals got access to the NYSE market. Prior to ITS, the saying was, you had to come in the front door.” 22 It was a good deal for the regionals and impact on the NYSE was minimal. Until 1981, NYSE personnel used ITS only on a voluntary basis. Afterwards, even when they may have been obliged to route orders through other exchanges, NYSE specialists ignored ITS. Up to that time NASDAQ stood outside of ITS. That changed in 1981, when the NYSE allowed the NASDAQ’s Computer Assisted Execution System (CAES), which handled NYSE-listed or “third market” securities, to connect with ITS. Perhaps most importantly, according to Mark Fitterman, who helped implement the system as an SEC staff attorney, ITS set an important precedent. At a time when experts differed on whether to create a single central limit order book or merely to ensure access to all existing markets, ITS created a "linked environment," later enshrined in Regulation National Market System.

Meanwhile, the NYSE continued significant technological upgrades to its floor. In 1984, a system called “Super DOT” was introduced that allowed orders up to 2,000 shares to be electronically routed to a specialist—15 years later, Super DOT handled 90 percent of the Exchange’s volume. Catherine Kinney’s team at the NYSE also automated limit order books formerly kept on paper. The first stock to go on a digital limit order book was Pan Am. 23 It was soon abundantly clear that electronics offered a way for specialists to keep up with ever increasing volume—within 18 months of the 1987 market break, the entire NYSE floor was on an “electronic book.” In the early 1990s, the NYSE also began linking all of the specialist posts on the floor with the upstairs offices. “Increasingly, the processing of those orders were automated, but the specialists still had to basically press the button,” noted SEC economist Larry Harris. 24

Between 1982 and 1995, the New York Stock Exchange spent more than $1 billion on screens, cell phones, and hand-held terminals. By the end of the century it could handle 1.4 billion orders a day. Just over 30 years earlier, 10 million share days had caused the paperwork crisis. The floor was efficient as could be perhaps, but while the NYSE upgraded everything around the specialist post, other players were perfecting electronic execution. In 1980, NYSE chairman Mil Batten insisted that NYSE technology “has been specifically designed to respect the crucial importance of human judgment in making execution decisions.” 25 Fifteen years later, when Richard Grasso took charge of the NYSE, he had to choose between continuing this stance and giving in to the change that was transforming every other market. Said Catherine Kinney: “I do think Dick wanted to change things. I think he very much bought into the notion of technology as the enabler, and a builder of business. I think Dick was extremely close, though, to the membership, very close to the floor.” 26 And that was a problem.

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(19) The Securities Markets - A Report, with Recommendations, by William McChesney Martin, Jr., August 5, 1971, 2-3.

(20) October 5, 2009, Interview with Catherine Kinney, 3.

(21) September 12, 2017, Interview with Bill Lupien, 33.

(22) June 8, 2007 Interview with Don Calvin, 32.

(23) October 5, 2009, Interview with Catherine Kinney, 13.

(24) September 26, 2017 Interview with Larry Harris, 12.

(25) "The U.S. National Market System: Progress, Problems and Issues" - Remarks by William M. Batten, New York Stock Exchange at EEC Symposium - "Towards a European Stock Exchange", November 13, 1980, 10.

(26) October 5, 2009, Interview with Catherine Kinney, 22.

Related Museum Resources


August 5, 1971
image pdf (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
April 20, 1978
image pdf (Courtesy of the National Archives and Records Administration)

Oral Histories

08 June 2007

Donald Calvin

September 6, 2017

Larry Harris

05 November 2009

Catherine Kinney

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