BOSTON — ALREADY heavily computerized, Wall Street will take a giant step closer to shedding its remaining paper trails by this time next year, when trading of stocks and corporate bonds becomes almost entirely electronic.
The impetus for the change, however, is not so much to create a paperless environment as it is to reduce risk. Currently, broker dealers and clients have five business days to settle up after a trade. The Securities and Exchange Commission (SEC) wants to cut that to three business days by June 1, 1995.
The reasoning behind the change: Reducing the number of days cuts down on the number of unsettled trades at any one time, narrowing the likelihood that a single institution that is becoming insolvent can gridlock the system and bring down other companies. (A company can determine its own losses from the insolvent institution, but it will continue to trade with other firms, whose liabilities with the insolvent firm are unknown.)
Trade-plus-three, as the new SEC mandate is called, will inevitably cause upheaval. For the small investor still hanging on to share certificates in his lockbox, getting those shares and a check to the broker in 40 percent less time will make any transaction a scramble. For the securities industry, new procedures, regulations, and software systems will entail considerable training and fine-tuning.
Evan Cooper, editor of Security Industry Daily, a trade newspaper in New York, suggests that the change is largely cultural. Technologically, T+3 doesn't present any major hurdle, he says. Rather, resistance stems from lack of familiarity. Mr. Cooper gives the advent of the automated teller machine as an example. ``People couldn't get used to the idea of getting cash out of a wall rather than a [bank] teller at first,'' he says. ``Now most [people] prefer ATMs.''
Some security industry people say T+3 represents more than simply adjusting one's mind-set, however. Benjamin Edwards III, chairman of A. G. Edwards, the country's largest securities firm outside of New York, is unequivocal. ``It's trying to fix something that isn't broken,'' he says. ``The thesis and the justification for [T+3] is that time equals risk.... [But] I'm not aware of any time it has been a real problem for our industry.''
Like Mr. Edwards, many people in the securities industry feel the importance of T+3 has been overblown, Cooper says. SEC and Securities Industry Association officials openly admit that there have been no cases in the United States in which settlement has been an issue.
The idea for T+3 surfaced in 1988, when 30 international financiers - known as the Group of 30 - sat down to discuss worldwide settlement issues and risk. Then each country examined its own settlement system. The US decided to forge ahead with T+3. But this decision was based on a series of studies that failed to consult any clients, Edwards says. His reservation, among others, is that much of the world is already lagging behind the US.
``Great Britain is still settling in a fortnight, France at the end of the month, and Italy whenever they feel like it,'' he says. ``We are the only country that is compressing down to settling on trade day ... and we will have inconvenienced 40 million investors.''
The inconvenience is primarily for small individual investors, who will be almost obliged to keep their certificates ``in a street name'' - the name of his or her brokerage house - and have money on hand at the brokerage firm in a cash management account or the like. This will enable a broker to buy or sell stock and be paid right away.
Edwards argues that this is an invasion of privacy, since the broker will then have full knowledge of all a client's shares and transactions.
Michael Reddy, chairman of FACS Corporation International in New York and adviser to the SIA clearance and settlement committee, defends the change. Historically, the US securities market has been a role model for securities industries worldwide, he says, and is one of the safest and most efficient. That is reason enough to stay ahead of the curve. ``This is an industry that is making a monumental change to its processing activities,'' he says. ``And its processing activity is the heartbeat of what keeps the public coming back.''
The securities industry has long discouraged customers from requesting paper share certificates. But even under the new system, the certificates will not be phased out. Nonetheless, the industry will operate more like mutual-fund companies, in which shareholders have for years conducted transactions over the phone, with nothing but their monthly statements as proof of purchase.
The SEC's eagerness to reduce risk comes at a price. For small firms with less-sophisticated computer systems, the capital outlay could be considerable. And the lack of an industry standard makes choosing how to automate an added challenge.
``One of the problems is that there is no standard way of sending information electronically to brokers,'' says Steven Kelly, a vice president at the investment management firm Scudder, Stevens & Clark Inc. in New York. ``Several networks have been developed, but no vendor has every broker we use on their network. Everyone does it their own way.''
``A standard way would make life easier for the institutions and brokers,'' Mr. Kelly adds.
Now, in the case of a purchase or sale of a large block of stock, a portfolio manager sends a request to an in-house trader on paper or by computer. The trader calls a brokerage house to negotiate the best price and waits for a call back confirming the sale. The details are sent to the Depository Trust Company - a clearing agency for trades - and confirmation comes back the next day. With a fully computerized system, requests and trades would pop up on each respective party's computer screen and largely obviate the need for phone calls. Errors also would be reduced.
Another concern for securities firms is customers' low level of awareness about T+3. The securities firms worry that they will sound like the bad guys, Cooper says. ``The government has imposed [T+3],'' he says. ``Meanwhile, customers will get notices from their firms saying: `You've got to pay us real fast.' ''