Three years ago Chicago`s futures exchanges were rocked by the revelation that federal undercover agents had infiltrated the trading floors to investigate allegations of extensive criminal fraud and abuse.
The probe led to 48 indictments, the convictions of more than two dozen brokers and several changes in trading practices by the Chicago Mercantile Exchange and the Chicago Board of Trade-all aimed at restoring public confidence and market integrity.
Now, months after the last trial and weeks after President Bush visited both exchanges in what some saw as a symbolic forgiveness of past sins, Merc brokers are pressuring exchange leaders to abandon one reform instituted after the scandals: a ban on dual trading.
The timing of the members` drive is unfortunate and embarrassing for Merc officials. If the reform were repealed, the sincerity and depth of their commitment to keeping their own house and image clean would be questioned. If banning dual trading was a good idea a few years ago, why isn`t it a sound one now?
Allowing floor brokers to fill customer orders and trade for their own accounts on the same day is a widespread practice in the futures and securities industries. It increases the liquidity, or depth, of the markets by ensuring sufficient buyers and sellers and enough capital, even in slow times. It adds to market efficiency by helping customers get the best price.
But there`s an obvious potential for brokers to profit on information provided by customers before the customers themselves can gain. Economists and exchange officials argue, however, that such ”front-running” abuses are easily detected and punished.
Nevertheless, a blue-ribbon committee, which included several top Merc officials, advised the exchange to make several changes, including stiff restrictions on dual trading. The members overwhelmingly approved it, and the ban took effect last May.
But the rule has hit where it hurts: the wallet. Some members say the ban has reduced their income, and they want it lifted whether their image suffers or not.
The Board of Trade never restricted dual trading and consistently lobbies against legislated curbs on the practice. (Congress still is trying to break a three-year deadlock over beefed-up regulation of the futures industry and is also trying to decide whether to restrict dual trading at all futures exchanges.)
Board of Trade officials point out that development of a handheld electronic trading card that records trades instantaneously should eliminate most abuses. But the device won`t be ready for broad application for another year or two. What to do in the meantime?
Running a futures exchange is no easy business. It`s more like managing a private club than a corporation. But, at the risk of making some members unhappy, the Merc should stick to its reform. Until the electronic audit system is widely used, avoiding even the perception of conflict of interest is more important than helping some traders make a few more bucks.
