CBOE Pioneers Portables For Trade Reporting; Lasalle Street Becomes Silicon Gulch

The Chicago Board Options Exchange plans to begin testing portable computers for market makers -- becoming the first Chicago market to put digital technology directly into the hands of floor traders.

Next month, four CBOE members who trade for their own accounts will replace pen and trading cards with communicating hand-held computers. The portable touchscreen units will record transactions in the crowds where Standard & Poor's 100 and 500 index options and two different equity options trade.

Although the pilot is scheduled to last 60 days, CBOE officials say they'll know within a week if it's a success.

"We are testing the market maker's ability to interact with the terminal," says Bob Walsh, vice president, trade processing. "Once that is apparent, we expect to increase the number of units in use."

No plans are afoot currently to give the lightweight computers to brokers who execute customer business. Under CBOE rules, a market maker who trades for his own account may also act as a broker, but not on the same day.

If the touchscreen terminal wins acceptance among CBOE market makers, it could dramatically change life in Chicago's frenzied futures and options pits. While prices will almost certainly continue to be set by open outcry, the portable computer can reduce costly out-trades and speed up price reporting.

Although the Chicago Board of Trade and the Chicago Mercantile Exchange insist that portable computers cannot help fulfill the Commodity Futures Trading Commission's requirement that all futures transactions be recorded to the nearest minute, both exchanges are closely monitoring the CBOE's efforts.

In the first phase of the pilot, information stored in each handheld unit's 256K RAM will be periodically downloaded via wire into microcomputers on the exchange floor. Eventually, however, inboard radio transmitters will send data from the portable devices to a base station beneath the trading floor.

Under the CBOE's existing system, after a trade is made, buyer and seller record the transaction on cards submitted to the exchange at the end of the trading day. The seller immediately gives a tear-off sheet to an exchange employee responsible for reporting prices.

Until the early 1980s, prices and times were entered on computer terminals stationed throughout the trading floor. When the floor became too crowded, the CBOE began equipping some price reporters with headsets to communicate with data entry personnel in another part of the building.

But this system was labor-intensive because it required two people to record each transaction, says Ed Joyce, CBOE vice president, trading operations.

A year ago, the CBOE began a radio transmission pilot for price reporting and the headsets were replaced by 20 portable computers, which are used to report information to the CBOE's time and sales register.

The pilot involving the price reporters proves that wireless transmission can be used to relay information within the exchange, says Joyce. What remains to be seen is whether market makers are willing and able to use hand-held units to record trades.

Some CBOE market makers remain skeptical that portable computers can keep up with their activity, which can run as high as 10 transactions/minute. But CBOE officials are confident that the new system won't fall behind.

Still uncertain is whether 400 portable transmitters can be used simultaneously in a small area without posing a threat to data integrity, says Joyce.

To encourage members to the adopt wireless trade entry, the CBOE is offering a few incentives. A market maker can call up his position on the device throughout the day and can also program the computer to calculate the number of shares that should be bought or sold to hedge each trade.

There are also plans to notify a market maker on his hand- held terminal when a trade has been assigned to him by the CBOE's Retail Automatic Execution System. Currently, when RAES assigns the other side of a trade to a participating market maker, he receives a hand-delivered computer printout.

The CBOE hasn't decided on the equipment to be used for trade reporting. An Epson model EHT-10 weighing a little less than two pounds is being used for the pilot, but the CBOE is encouraging other vendors to compete for the business. The hand-held computers and base station for wireless price reporting are made by Motorola Inc.

If the portable units become widespread among CBOE market makers, price reporters will no longer have to collect cards from market makers on the sell side of a trade. All price and trade reporting will be automated for orders executed by CBOE members for their own accounts.

The CBOE has already computerized 30% of its retail orders through the RAES system and plans to introduce an electronic order book for the exchange officials responsible for handling limit orders. As on a stock exchange, public orders that cannot be filled at current market prices are recorded in a book. But the book is run by a CBOE employee rather than a specialist.