Through years of leadership at the Chicago Board of Trade, former chairman Billy O’Connor has always stood up for open outcry.
Yet these days, O’Connor sees the writing on the screen: The futures business is shifting inexorably toward computerized trading systems.
“Electronic trading is getting a foothold in all facets of our industry,” he said. “(Open outcry) has problems down the road. The less efficient marketplaces will be attacked. Pretty soon what you have is all-electronic trading.”
O’Connor is hardly alone in his convictions. And evidence of the screen’s ascension is mounting at a surprising pace.
This summer, trading systems have sprouted where open outcry flourished unchallenged for years. The latest milestone comes Tuesday, when a new pit opens directly on the trading floor of the Chicago Mercantile Exchange to offer stock-index futures via computer.
The Merc’s decision to put a mini-version of its Standard & Poor’s 500 on the screen reflects a key change in attitude. It’s the first time a U.S. exchange is making one of its bread-and-butter contracts available for electronic trading during daytime hours. More could follow if the Merc’s experiment succeeds.
Fear of competition is forcing exchanges to recognize that computerized trading works better than open outcry in at least some applications. And some experts believe, like O’Connor, that many open-outcry markets will vanish if they fail to adopt technology that makes them cheaper and more efficient.
To be sure, a black box won’t suddenly replace the biggest, most liquid futures pits. As O’Connor and others point out, technology still hasn’t bested open outcry’s efficiency for volatile, high-volume contracts, or for relatively complex transactions, such as options on futures.
Yet computers are nibbling all around the edges. Pushing aside shouting, waving traders, they’re handling some less-active futures contracts, as well as primary contracts during off hours. Increasingly, new contracts are debuting via computer instead of open outcry. And the screen could prove better for the back months of big contracts, and all smaller orders, too.
As the bits and bytes compete directly against the rough-and-tumble of the pits, a rich tradition hangs in the balance. For better or worse, the image of open-outcry personifies business in Chicago– hoarse, sweaty guys standing shoulder-to-shoulder in colorful jackets, muscling the market through its paces.
Veterans like Burt Gutterman at the Board of Trade can almost feel computers nipping at their heels.
“Opportunity is taken away an inch at a time,” he said. “You’ve got to make a choice whether you want to stand in the pit, or behind a screen.”
It’s a choice being made around the world.
In London, for instance, an established open-outcry market for the first time is losing market share to a newer, screen-traded contract, the Deutsche Borse’s bund futures.
The Londoners, shaken, have stirred. Among other steps, their London International Financial Futures Exchange has earmarked funds for developing a new, more efficient electronic trading system. They’re also throwing open the doors to member firms experimenting with computerized order-entry systems.
In addition, they’re planning to scrap open-outcry links between Chicago and other cities in favor of screen-based trading links.
Meanwhile, volume has surged on exchange-run systems such as the CBOT’s Project A and the Merc’s Globex.
On Sept. 2, the Board of Trade joined forces with over-the-counter broker Prebon Yamane to market yet another computerized trading system. This one will offer cash government securities and over-the-counter derivatives.
Some trading firms even have discussed the most direct threat of all: a new electronic trading and clearing system to replace Chicago’s futures exchanges. Though no one’s acted on that idea, the main goal–reducing the cost of doing business–remains attractive.
The message for futures exchanges is clear, said David Downey of trading firm Timber Hill LLC. “They have got to make access to these markets better, stronger and faster. The pressure’s on.”
Yet for Chicago’s exchanges, embracing technology means facing down opposition from members who worry that increased efficiency will hurt their profits.
The conflicting tensions already have affected the launch of the Merc’s mini-S&P 500.
Bowing to floor traders, the Merc at first handicapped its computerized system by restricting it to orders of 50 contracts or less, requiring bigger orders to be filled via open outcry.
A few weeks ago, the Merc bowed again, reducing the restriction to 30 contracts or less. That will shrink to a 15-contract limit when the Merc splits its full-size S&P contract later this year. “We don’t want this contract to become a parasite on the bigger contract,” explained Merc Chairman Jack Sandner.
Still, the worst fears about the new contract replacing open outcry are unfounded, said Merc Chairman Emeritus Leo Melamed. On the contrary, he expects the screen trading to boost the stagnant volume of the big open-outcry pit by attracting new customers. “We can increase business . . . and not endanger the open-outcry system,” Melamed said.
But even as the Merc tries to soothe the fears of its open-outcry traders, it is extolling the virtues of electronic trading in marketing materials related to the mini-S&P, known as the “E-mini.”
“You can know the movement of the market the way floor traders and institutional traders know it,” the Merc promises in its ads. “You get a quick confirmation of your trade. And E-mini trades around the clock.”
In gee-whiz tones, the ads pledge, “Electronic trading brings the pit right to your office. You’ll be able to trade the mini-S&P from your own computer, putting in orders with keystrokes.”
Another Merc promotion might be the most telling of all. To encourage market users to trade by pointing and clicking, the exchange is giving away computer-mouse pads emblazoned with the E-mini logo.
Unlike most pads, these are eight-sided like stop signs. In the futures business, that octagon shape has special meaning: It’s the same as traditional open-outcry trading pits.
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