In the debate between open outcry and electronic trading, one thing is certain: technology rules.
While some exchanges are concentrating solely on electronic trading, others aren't willing just yet to throw the benefits of the pit out the door. All are trying to achieve a balance between the pit's liquidity and the screen's efficiency.
Perhaps the essence of the controversy was captured by Dr. Peter Kollock, a researcher studying exchanges and technology at the University of California, Los Angeles. "The issue is not whether we should choose open outcry or electronic trading in their current forms, but how we can combine the best elements of each in new trading systems make possible by advances in technology," Kollack writes (Futures Industry Magazine, "Market Morphing," October/November 1997, page 15).
Some of the world's top exchanges, including CBOT and LIFFE, seem to agree. They concede, however, that keeping up with burgeoning technology--other than that required by order routing--is key to maintaining competitive trading in both platforms.
LIFFE's Technology Plan
LIFFE bills themselves as a "hybrid" exchange, equally committed to screen trading and open outcry. Simon Orebi Gann, managing director of information technology predicts, "Electronic trading will be successful if the benefits of the pit can be duplicated on screen--transparency, flexibility, and liquidity." He believes that APT and Project A are "less unpopular" than other trading systems because they simulate pit trading. But, instead of concentrating solely on how to refine electronic trading, LIFFE and some other exchanges are bringing technology to the floor to make open outcry more efficient and competitive.
An incremental series of changes will take place over the next five years at LIFFE. "We're making a substantial investment in the floor, in automated trading, in the common components of both, and in an equity options system," said Orebi Gann. All of the components are directly linked, and they all complement one another.
In November LIFFE began using hand-held terminals that link equities traders directly to the London Stock Exchange. In the fall of 1998, they will launch electronic options trading on individual equities. LIFFE hopes both of these components will complement their current contracts and perhaps give the exchange a competitive edge by reaching private investors and fund managers.
"We're only interested in developing technology that our members can't get elsewhere," says Orebi Gann. Other exchanges have developed hand-held trader cards and other order routing technology--LIFFE wants to develop an exceptional infrastructure to support that technology.
In fact, they are developing a computer framework that will simultaneously meet the needs of their open outcry and electronic markets. By studying the similarities between the two, LIFFE's technology team hopes to get more mileage out of their research and development dollars and more efficiency from both platforms.
"We're looking at a whole chain of transactions, both pre-trade and post-trade," says Orebi Gann. "Many functions (in open outcry and electronic trading) are identical. If the process is the same, the same computer system can support both platforms."
LIFFE is also working on an information distribution system to connect the main trading floor with their new floor in the old London Stock Exchange building when it opens next May. The system will allow traders to customize their trading screens. Booth operators can organize information and display it according to the individual specifications of each booth operator.
CBOT's Wired Floor
The Chicago Board of Trade is also "extremely committed" to open outcry trading, but realizes it has to commit resources in order to keep it competitive, according to Don Karmazin, vice president of information technology.
Although order routing constitutes a large portion of CBOT's technology battle, management is investing in other technologies. CBOT's new trading facility, which opened February 1997, includes 680 linear feet of state-of-the-art price boards. The displays allow almost real-time information flow from trader to board and are capable of receiving 1,500 characters per second, 150 percent faster than the old system. Driving the new system is a PC-based interface, which allows futures and options price data, cash market information, news services, and other information to be displayed at any location. CBOT hopes this new system will make the traders and the exchange more competitive.
The price boards are only a part of CBOT's technological agenda. The new trading facility can simultaneously accommodate 20,000 electronic devices, including 12,000 computers, 6,000 voice devices, and 2,000 video devices. Wondering how much wire that takes? The new facility houses 27,000 miles of cable, enough to circle the Earth.
Ironically, the CBOT is currently investing a large part of their technology budget in wireless communication. Their internal system of wireless headsets allows hands-free, two-way communication through a connected microphone and an earpiece.
"Wireless headsets improve communication for traders who don't have sight lines from the pit," says Karmazin. He also notes that the headsets speed up communication to the back office, eliminating the need to go through the booth.
Roger Martinez, CBOT's vice president of telecommunications, said that traders have used wired headsets since 1989. About 600 of them are used today. The exchange has incorporated 300 wireless sets over the last two years. "Traders in the agricultural pits, who need to be more mobile than traders in the financial pits, use the majority of the wireless sets," says Martinez. He likens the technology to the kind used for cellular phones.
The wireless technology isn't perfect. Martinez says it's a full-time job keeping all 300 sets functioning in such proximity to each other. "There are more antennae around here than you can imagine," he says. (Currently, the number stands at 34, which can handle several hundred conversations at the same time.) The exchange plans to add 200-300 more wireless sets over the next couple of years.
Similarly, the Chicago Mercantile Exchange uses about 320 wireless headsets and 100 wired ones on its floor, mostly to correct "sight-line problems" from the pit to the booth, according to Charlie Barwis, vice president of technology marketing. The traders and clerks also use the headsets to get quotes while keeping their eyes on the action, he said.
Members, brokers, and locals use the headsets, according to Barry Zweibel, vice president of telecommunications at the CME. "The headsets are basically portable phones with a headset attachment," he says. Users can dial a four-digit number to reach another pit or the back office, much like they would using a regular office telephone system. Most sets, however do not allow access to external calls. The exception are headsets for locals, which allow unrestricted calling access from the floor.
The Merc plans to add more wireless sets soon. "Demand (for the wireless headsets) has been brisk," says Zweibel. "We're regularly ordering new ones."
The CME encounters many of the same pitfalls as the CBOT when using wireless technology. "Adapting (our systems) has been very challenging," said Zweibel. He cites the dense use of sets in a small area and also what he terms "simultaneity," or the use of many wireless devices at the same time. "We must find a way to make wireless communication work in a crowded market, but we don't want to over-engineer," he said. He said that getting the technology to perform well during high-use and low-use times is extremely challenging.
Zweibel also says that the topography of the CME floor¾the hills and valleys that the pits produce¾creates other engineering challenges. "The signals have to find their way" around many people and objects, he said.
How does all of this technology affect trading? "There is much more information to be processed, and it must be processed more quickly than ever because information flow is instantaneous," says Jake Morowitz, president of USA Trading and soybean trader at the CBOT. "Traders have to be more responsive."
Morowitz adds that trader cards used in the pits are now one-sided instead of two-sided to facilitate technology-based trade-reconstruction audits. The one-sided cards mean that card pick-up is more frequent and the pace on the floor is therefore much faster.
Morowitz believes that the Chicago exchanges will eventually adopt hand-held trading devices, despite the multi-million dollar fiasco of a few years ago. "Competition will force the need for cheaper commissions," says Morowitz. He believes Chicago wasn't successful before because the technology wasn't sophisticated enough. According to Morowitz, some electronic cards manufactured by private companies like Timber Hill are in use now at CBOT. "Locals will begin to use them in the foreseeable future," Morowitz predicts.
But Morowitz isn't intimidated by the technology. "(The new technologies) are just tools. They're not negative, and they're not positive. We just have to adjust."
As with other technologies in other industries, this type of communication has and may continue to cut staffing requirements. With direct communication devices, traders can bypass the booth, forgo the runner and communicate directly with another pit. With a trend toward using more headsets and other technologies, some people are bound to be kicked out of the loop.
So, life on the exchange floor is analogous to life anywhere in the information age. Technology is the key to information access, and information means a competitive advantage. More information and faster delivery is the Holy Grail for most businesses, although it's an infinite quest. What constitutes enough information, and how fast is fast enough?
Along with the rest of us, open outcry falls victim to the information age. The resolution can only be that in the battle for "efficient liquidity" in the pit, the exchange with the most advanced technology systems wins. At least until someone changes the rules.