SURVEY - DERIVATIVES: Easy trades thrive on a complex platform: ELECTRONIC TRADING by Andrei Postelnicu: Europe, not the US, has taken the lead in new technology
Financial Times, Sep 25, 2001
By ANDREI POSTELNICU
While no one contests that electronic trading platforms have been transforming the derivatives universe, it is the magnitude, impact and pace of such changes that make the subject one of keen debate within the industry.
In the financial markets, the impact of electronic trading platforms and the appetite for implementing them varies by geography and the culture and structure of the exchanges making the transitions, says Scott Shellady, chief operating officer at Patsystems, a provider of electronic trading platforms and services.
He says Europe has been quicker to respond to the rise of electronic trading, citing Eurex as "an example to emulate" in terms to adopting electronic trading.
On the other hand, he says it is understandable why the Chicago Board of Trade might take longer to replace open outcry trading with screens due to the membership structure of the CBOT.
"Change has to happen at the pace of the market and successful changes have to come from within," says Michael Daymond-King of Garban Intercapital, the leading derivatives house. Merely implementing the platform and expecting traders to adopt it is not enough, he says.
Increased efficiency, transparency and lower transaction costs are not the only attractive points of electronic trading platforms if these factors are not aiding liquidity in the market.
"We have to have good and useful technology, along with liquidity, before such a shift in habits takes place and traders talk over the screen rather than over the phone," says Mr Daymond-King.
In some markets, the increased transparency brought about by electronic trading can be a deterrent to liquidity, he says.
On the other hand, if technology helps traders capitalise on opportunities they would not have otherwise seen, it is very likely that electronic trading platforms will catch on.
"If a grain trader is seeing no activity for weeks in wheat contracts but catches a glimpse of high activity in the forex market, he will probably start trading some euro-dollar or euro-yen contracts and make his money there," says Mr Shellady.
Industry insiders agree that the nature of the products traded plays a very important role in the way markets make the transition towards electronic trading.
"Products that are currently traded electronically tend to be highly liquid, standardised and easily understood," says John Mooren, product manager at Front Capital Systems, a provider of electronic trading technologies.
He cites straightforward vanilla (interest-rate) swaps as an example of a product lending itself more easily to electronic trading.
At the other end of the spectrum are complex, structured deals where a great deal of negotiation and human contact is needed to bring the trade to fruition.
"In the case of a risk hedge on a loan - by using a combination of, say, credit, currency and interest-rate contracts - the efficiency gained through technology is less important than knowing exactly what the other party is doing and talking with them directly," says Mr Mooren.
Electronic trading leaves very little room for the kind of negotiating needed for concluding more complex deals, he says.
The recent weakness of equity markets has helped volumes in the derivatives markets and has not forced exchanges to look at new ways of doing business, says Mr Shellady. In addition, he and others point out that weakness in the banking and financial industry has tempered both enthusiasm for and investment in new technologies.
Beyond financial products, trading in the energy and utilities sector has experienced remarkable transformations in the last year due to the emergence and implementation of electronic trading platforms, says Mark Lillie, a partner at Accenture, the consultancy.
A combination between a political environment that encouraged the deregulation of energy and utilities sectors in Europe on the one hand, and the 'internet boom' on the other hand, has made for a sweeping change in the way things like electricity and fuels are traded, says Mr Lillie.
"As much as 50 per cent of the energy and utilities trades are done online, with brokers offering electronic trading as well as more traditional ways to trade."
Technology enables traders to tame the traditionally volatile prices of commodities, and contributes to increased liquidity and transparency, which causes Mr Lillie to comment that "the internet was made for trading commodities".
However, commodities markets encounter the same challenge as financial markets when it comes to adopting electronic trading: more sophisticated contracts that are harder to standardise continue to be traded in the traditional ways.
The key question becomes how quickly will markets run along this spectrum of complexity of products and move them all towards electronic trading platforms? Specialists agree that timing will be key in implementing new technologies, but cannot forecast this 'electronic revolution'.
Copyright: The Financial Times Limited
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