In man vs machine battle, futures traders buy some time
By Greg McCune
CHICAGO, March 19 (Reuters) - Not long ago industry experts predicted that the waving, shouting, colorfully-dressed traders in the Chicago exchange pits would soon go the way of the dinosaur, replaced by the silence of electronic trade.
But a funny thing happened on the way to extinction -- trading volume in the pits actually went up last year.
On the surface, it seems that happy days are here again in Chicago. Volume on the Chicago Mercantile Exchange, the largest U.S. futures market, surged 78 percent last year.
At the venerable Chicago Board of Trade, the world's oldest futures exchange, volume jumped 11.5 percent in 2001 due to more active financial futures and options contracts.
Both exchanges showed profit last year as higher volume boosted income from trading fees. The exchanges managed their robust performances even though electronic trading accounted for just a fifth of the volume of both exchanges in 2001.
But look beyond the increased volume and the situation in Chicago is more troubling. Electronic trading is growing rapidly internationally, and those who use the computerized markets like the low cost and efficiency they bring.
Change advocates continue to call for a faster pace of automation, although the strong performance of the last year has emboldened the traditional traders who call orders in the trading pits.
The conflict is leading to a battle for control at the Chicago Mercantile Exchange leadership because of worries over the pace of change.
``They (Chicago) don't want to change. The market was so good last year, they are thinking 'it's working again, so why should we do something new or dangerous for us?''' said Patrice Blanc, Chairman of trading firm Fimat USA, Inc.
ELECTRONIC BOOM
While Chicago clings to traditional ways, the rest of the world had moved rapidly to electronic trade. Two powerhouse derivatives exchanges have emerged in Europe -- the world's largest futures exchange, Eurex, and Euronext/LIFFE, a merger of stock and derivatives marts -- both exclusively electronic.
Once preeminent, Chicago's share of world derivatives trade shrank to just 21 percent last year.
And new exchanges are springing up to take on Chicago as a derivatives hub. The most successful, the International Securities Exchange, last year cut into the stock options business of the Chicago Board Options Exchange. Another electronic exchange, BrokerTec, has set out to peal away Chicago volume in goverment bonds with limited success so far.
At least three other groups, including a consortium of LIFFE and stock exchange Nasdaq, electronic stock trading system Island Futures Exchange, and the American Stock Exchange, are lining up to take on Chicago later this year in single stock futures, the newest niche in U.S. futures trade.
FRIGHTENED INTO CHANGE
A few years ago the Chicago exchanges were so frightened by electronic trading they took halting steps to reform. They reached outside their own ranks to hire new chief executives to run the exchanges more like public companies. The CME in 2000 hired James McNulty from the investment banking firm Warburg Dillon Read, and last year the CBOT hired David Vitale from Bank One Corp (NYSE:ONE - news).
They took steps to ``demutualize'' or transform themselves from member-owned to publicly-listed corporations. The CME could launch an initial public offering at any time, while the CBOT is not yet as far along in the process.
They have invested in electronic trading systems -- GLOBEX at the CME, and a/c/e, a venture with Eurex, for CBOT.
For a while the strategy seemed to offer the best of both worlds -- prepare for an electronic world and keep open outcry trading going as long as possible. But in a strange irony, the trading boom last year has fueled a backlash.
``Now people say things are going pretty well, maybe we can slow down,'' CME Chairman Scott Gordon told Reuters. ``We can't stop (innovating) because we had a good year.''
Industry sources told Reuters that the CME old guard, led by former chairmen Leo Melamed and Jack Sandner, are organizing an effort to oust Gordon and replace him with Vice Chairman Terrence Duffy, who they believe is more in tune with the wishes of the traders in the pits.
The battle could play out around April 17, when Gordon is standing for reelection to the CME board.
LAST STAND IN THE PITS
Reform-minded traders in Chicago and industry officials outside said another bout of infighting would be a setback for Chicago's efforts to transform itself.
``It is impossible for me to imagine five years from now any open outcry trading almost anywhere in the world,'' Ron Hersch, Senior Managing Director of Bear, Stearns & Co. Inc, told the annual futures industry conference in Florida last week.
Some companies are starting to complain that Chicago's straddling the fence between the pits and computers is costing them money because they must keep parallel pit trading and electronic trading operations.
``Having to support these two venues is really killing us,'' Hersch said.
The dual systems mean that it is more expensive to trade on U.S. markets than in Europe, FIMAT's Blanc said.
To be sure, there are practical problems to sort out before Chicago trading could move exclusively to electronic systems. For example, traders said that the sophisticated spread strategies used in Eurodollars are easier executed in the pits than on electronic screens.
But others said the pace of technology is so fast that before long even the Eurodollar trading complexities could be sorted out on electronic systems. The CME is investing in software to do just that.
A few of the basic commodity markets such as metals in London and grains and livestock in Chicago may continue to trade in the pits for a long time, industry sources said.
``What we would like to see is the big financial contracts go all electronic,'' FIMAT's Blanc said. |
