The Chicago Board of Trade unveiled the latest weapon in its battle with the New York Stock Exchange over who has the best trading system.
A study commissioned by the Board of Trade and released Thursday concludes that liquidity is greater in a futures-style pit-trading system, which uses competing floor traders. Liquidity, in this case, is the ability to handle big orders without major price swings. The NYSE relies largely on a single trader known as a specialist and charged with maintaining an orderly market.
Merton Miller, University of Chicago finance professor who co-authored the study with Sanford Grossman of Princeton University, suggested at a press briefing that the NYSE try a Chicago-style system for some of its most active stocks, such as IBM and AT&T, to ”ease some of the strain” on specialists.
”The specialist system is clearly beginning to show signs of wear and tear around the edges, and it`s not clear how much longer it can be kept in play,” Miller said later in a speech at the IIT Chicago-Kent College of Law commodities law institute.
He described the nearly 87-point drop in the Dow Jones industrial average Sept. 11 as one of the ”unpredictable tidal waves” that are ”ominous” for the specialist system. The specialist ”is going to be wiped out,” Miller said in an interview.
The study is timely, because many analysts have blamed stock-index futures for the market`s precipitous drop. The Board of Trade has argued that the stock market isn`t equipped to handle a flood of orders to buy or sell, because the specialist`s capital is too limited.
NYSE officials disagree. ”The integrity of the marketplace cannot be reflected by a pit trader or the Chicago system, because there is no ongoing commitment” to maintain an orderly market, said Richard Torrenzano, NYSE vice president. ”The system we have in place is the best system in the world. It has proven itself time and time again.”
Miller said a futures-style system may ”buffer some of the short-term volatility” in the stock market but wouldn`t have prevented the huge recent drop, which he said was triggered by economic factors.
