Futures Automation Joins 20th Century, But Is CME Waffling On Open Outcry?

In some ways, the CME's agreement with Reuters is like jumping aboard the Concorde after years of driving a horse and buggy. For 100 years there hasn't been much change in the way futures contracts are traded -- exchange members still crowd into the pit, where they shout and wave their arms to attract attention to their bids and offers.

Most technological advances in futures trading have occurred in price reporting and clearing, so the CME's decision to embrace automated execution -- albeit when the exchange is closed -- comes as a shock.

Like the CBOT and other commodity exchanges, the CME has frequently condemned Intex, the computerized futures market based in Bermuda, as heresy to the sacrament of open outcry.

While some see automated trading as a threat to open outcry, it's no surprise that the CME isn't framing the issue to its membership in those terms. "The lifespan of the open outcry system can be substantially extended," says the strategic plan, "if an open outcry system integrates those components of automation that will enhance the effectiveness of its order entry and execution processes without destroying the basic elements of the auction process."

One obvious question raised by PMT is whether it violates the federal requirement that U.S. exchanges trade futures using open-outcry. The answer is no, says Ken Raisler, the former CFTC general counsel who's now a partner in the law firm Rogers & Wells.

"The Commission sees automation as a way to improve its ability to survey the market," says Raisler. "There is a perfect audit trail in an electronic environment."

Unlike their counterparts in the securities industry, the futures exchanges have yet to develop systems that electronically route orders from a brokerage firm's offices to its booth on the trading floor, that handle small orders, or that pair off orders before the market opens.

During the last decade or so, all of these have been done at the New York Stock Exchange, which so far has resisted the "black box" solutions put forth by the Cincinnati Stock Exchange, Instinet, and others.

Besides bypassing the intermediate technology solutions implemented at other exchanges, the CME is allowing a vendor to supply its automated trading facility instead of building it in-house. The CME went to Reuters because the cost of building a network to support off-floor transactions would be prohibitive, says Serpico. "It doesn't make sense to re- invent the wheel," he says.

The CME may take the same approach when it comes to order routing. Reuters might be selected to supply an order routing system for the CME's new trading floor, Serpico says.

"One of the obvious alternatives is to use Reuters as a routing system," he says, "but we haven't made decisions as to whether we're going to build or buy a system that electronically routes orders."

Reuters offers an order entry service to Monitor subscribers allowing orders to be sent to a broker's booth on the trading floor, but the arrangement is between the broker and his customer and doesn't involve the exchange.