Bidding Their Brokers Goodbye

By THOMAS McCARROLL

The name and the claim sound like someone's idea of a joke: the Wunsch Auction System, looming threat to the New York Stock Exchange. The setting is no more promising. Ex-broker Steven Wunsch, 44, is launching his enterprise from an apartment crammed with stationery, two sagging sofas and a personal computer. But Wall Street and the 199-year-old N.Y.S.E. regard Wunsch with utter seriousness. His mission is to prove you can exchange stock without stock exchanges, and he seems to be succeeding.

The Wunsch Auction System opened for trading last week, linking buyers and sellers of all registered stocks directly through a personal-computer network. Brokers? Unnecessary. Floor traders? Get real. With all those hands and pockets out of the loop, the only commission involved is Wunsch's, and it is as much as 90% lower than normal commissions and fees. That has investors excited and stock exchanges worried. The exchanges, notably the N.Y.S.E., are particularly afraid of losing the big institutional investors that account for most trading. In an unavailing effort to stop the upstart system, five exchanges petitioned the Securities and Exchange Commission, charging Wunsch with unfair competition and violation of securities laws. Unuttered was perhaps their biggest fear: obsolescence.

As devised by Wunsch, a former Kidder Peabody vice president, and two computer experts formerly with Cray Research, the electronic auction represents the most serious challenge yet to traditional Wall Street trading. Other computerized markets, like Reuters' Crossing Network and Jefferies & Co.'s Posit, also execute trades independent of the major exchanges. But trading at the exchanges determines share prices.

The Wunsch system completely circumvents the exchanges. Share prices are set through electronic bidding on Mondays, Wednesdays and Fridays at hours when the stock markets are closed. Using personal computers, investors anonymously enter the amounts of stock they wish to trade and prices they will accept. Before trades are executed, a central computer matches orders and calculates an equilibrium price in each stock. The system appeals to cost-conscious investors who don't have to trade daily. Says Theodore Aronson, a Philadelphia money manager: "The New York Stock Exchange had better wake up and read the writing on the wall."

So far, the exchange does not like what it is reading. The N.Y.S.E. charges that Wunsch wants to serve only transaction-heavy institutions, leaving the exchanges with lower-volume, higher-cost trades, mainly from individuals. Big Board chairman William Donaldson calls this "cherry picking." He also suggests that the Wunsch system may be riskier for investors, since it operates outside the exchange's many rules for data reporting and trader conduct. Donaldson wants Wunsch's system regulated as a conventional exchange, with trades conducted through broker-dealers.

Wunsch denies the cherry-picking charge and says he plans eventually to seek approval to open his system to individual investors. He also denies that his system is unsafe. Like other electronic market makers, Wunsch faces an uphill climb. Many Wall Streeters have a lot to lose from abandonment of the old system, and some traders just aren't comfortable doing business in a new way. But whether Wunsch succeeds or fails, he has established a principle that will shape securities markets from now on. As New York University economics professor Robert Schwartz puts it, "If computers can connect buyers and sellers, who needs brokers or exchanges?"