Money never sleeps. That's not news to financial markets, which have always been at the forefront of implementing technology and innovating to gain an edge and make a buck. The telegraph, stock ticker, telephone and microprocessor are all technologies that Wall Street either invented or improved.
Innovation based on microprocessing continues to bring rapid change to the markets. Trading floors at major exchanges around the world have vanished, thanks to the implementation of electronic trading systems. Exchanges everywhere have had to respond to technological change or risk a diminution in their business or, worse, extinction.
The New York Board of Trade, or NYBOT, the fourth-largest futures exchange in the U.S., recently began implementing an electronic order-routing system, or EOR, and an order-book management system, or OBMS. The new systems, which retain some elements of the old open outcry environment, are designed to speed up the execution of orders, and to save money and time by doing away with some of the paper and phone calls involved.
In this interview, Patrick L. Gambaro, the NYBOT's senior executive vice president and interim chief operating officer, and Warren Feuer, NYBOT project manager, describe how the new system came about and compare it with the current trade order-routing process.
How will NYBOT's electronic order-routing system benefit independent traders?
EOR is a part of a process that we at NYBOT have been looking to put in place for three to four years. It's a system that can route buy, sell and complex futures and options orders from a client's office or a customer's desk through an Internet connection down to the floor of the exchange, without the client having to pick up a phone. They can send an order directly to the floor via routing instructions that are predetermined in the system.
Currently, the broker gets the electronic message at his booth. He then receives a copy of the order via a small Epson printer at the booth, just as if he had written a phone order. The broker then transacts the business through open outcry. If not, he puts it on his deck, which is a specialist-type environment where he lists the buys and sells that are non-executable at the time of receipt. He will then advise the clerk in his booth as to the disposition of the order -- if it was filled, at what price or gives a "nothing done quote" with a size.
The clerk can then send electronically back to the client either an execution or the quote and size. He can also pick up the phone and call the customer. But electronically, the order is transmitted and has gone through the open outcry system for execution. The broker then does what he normally does with the order, just as if it were a phone order. He gives the information back to the clerk, and the clerk can then respond electronically and/or by voice.
Do you think this speeds up the process for independent traders?
It will definitely speed up the process. The electronic order routing system has been in place on both the commodity and equity side of the business for at least 10 or 15 years. The Chicago Mercantile Exchange (CME) has had TOPS
trade order processing system for quite some time. The
New York Stock Exchange
has (NYSE) DOT or SuperDot.
The super designated order turnaround system has been in place since the early '80s. So this is just a movement forward by the New York Board of Trade for us to get into that environment.
What we have also accomplished with this process is tapped into an electronic process for an order book management system, OBMS, where the order can be directed via the same transmission that we talked about earlier to the booth, as well as to a handheld terminal held by the broker in the ring.
We've taken a 125-year old process -- open outcry -- which is similar to the auction marketplace on the NYSE, automated it and left the open outcry environment intact. We truly believe that the open outcry manner in which we do pricing is the best for the commodities that we trade, rather than a total electronic trading system, or ETS.
Using this system, we can process in real time. We can have a real-time audit trail and the ability to do real-time risk management, which is very important to the clearing corporation and the trade house or futures commission merchant.
So how long are you finding that your fastest fills can be done? Of course, it depends somewhat on market conditions, but in normal market conditions, say with a two-tick spread on a limit order, how long would it take to get a fill back on my screen?
I would say at the most 15 to 30 seconds. If the order goes directly to a handheld terminal, the broker instantaneously sees it. It's microseconds for delivery of the order from the time you hit the enter button. If it is a market order, the market indicator light will flash and he will see the order immediately. If it is a limit order and the broker knows where his limits are on both his buy and sell sides, depending on which contract month he is trading, he will also see it instantaneously.
He could announce it to the crowd
in the trading ring as he normally would when he gets an order from the desk. He goes through the fill process. He could then send an instantaneous execution back to the source.
As far as the NYBOT is concerned, this process is a lot faster method of transacting business and sending back executions in this electronic media than if the clerk received the order over the phone, had to write down the order, clock the order, send the order out to the crowd and then receive a response back. In some cases, as you've said, depending on where the market is, it could take -- in that
non-EOR scenario -- one minute or more for a response to occur.
But because the booths are in a very close proximity to the trading ring, I would think that our servicing ability right now -- with and without the EOR -- is already excellent. But I think we can really speed it up via the order book management process because there is no running, there's no relay and the execution is sent directly back.
So you would definitely cut the time down considerably from about a one- to one-and-a-half-minute turnaround. I think our brokers on the floor pride themselves in the manner in which they service their clients with speed of execution, but we can even do it faster with the book management system.
What are some of the challenges of implementing the new electronic order routing system?
It's a very slow process, the education of a broker, the transition from a totally manual process to an automated one, one in which he is not accustomed to. It is a very slow transition.
Well, the thinking of most of our floor brokers is that the way they transact business right now is the best and cannot be improved upon. They can handle their books very efficiently, just as is, and they don't require a new process to move into the electronic world.
We, too, at NYBOT feel they do an excellent job in the way they currently are transacting business. However, as with anything, we can certainly improve the process, especially in the electronic world that we're in, where straight-through processing is key to a lot of the futures commission merchants
FCMs. I think this will enhance our ability to service our clients as well as enhance our ability to survey what goes on on the floor, and also to come up with a system that would merge the old manual process with a new and enhanced electronic arena.
Are you considering implementing side-by-side trading (i.e., simultaneous trading in currency futures products on Globex and via open outcry on the trading floor) like they have at the Chicago Mercantile Exchange in currencies?
No. Our competitors, such as
LIFFE, have put up a system and have closed the floor, and they have an electronic process that has contracts similar to ours. We need to stay abreast with what they are doing, as well as with other exchanges such as those in Singapore, Tokyo and Brazil. We need to stay close with those exchanges, which have gone electronic, and provide some type of service that will show the client that we can execute transactions in an electronic world as well as within the open outcry environment.
: There was an article I read earlier this year where you said that the overall objective in going to EOR was to "keep open outcry competitive." Do you think open outcry is losing its competitive edge?
No, I don't believe so. It's amazing that since we came to the disaster recovery site after Sept. 11, we have not lost any business.
NYBOT's current back-up facility is in Long Island City, Queens, N.Y., since 4 World Trade was destroyed. In fact, we've gained some.
During the week we were closed from Sept. 11 to 15, for those four days, our markets that trade on other exchanges
did not trade
because they couldn't get the price discovery that they required that NYBOT support internationally. They did not trade until we opened on Sept. 17.
During that first week, we averaged over 100,000 lots per day, trading only one and a half hours per product. We were transacting 40,000 to 60,000 lots of sugar that would normally trade within a four-hour session in one and a half hours. It went very smoothly with no major errors of concern.
So I don't think open outcry is going to be displaced. We are a supply-and-demand exchange; if the demand calls for sugar to trade 40,000 lots, they'll do it in one hour or four hours. It doesn't make a difference. But there are some contracts, obviously, within the exchange arena that would demand electronics: the financials and currencies, for instance.
We will all benefit from this from the standpoint of enhancing our open outcry process and not having to go to a fully electronic trading system, which our members believe is totally unnecessary.
Why are they so reticent to go to an electronic trading system?
Well, if I'm a paper broker, someone who handles customer business, the possibility arises that my services will no longer be required, and therefore I might lose my business. I then become a local or a proprietary trader. We have markets that we believe, after much investigation, that do not avail themselves to an electronic process such as ETS.
Because they are too small, much too small. We trade probably 20 million lots a year one-sided, so 40 million two-sided transactions. If you look at all the other exchanges, we are the fourth-largest exchange domestically. You're looking at other exchanges that trade 350 million lots a year; 700 million two-sided transactions.
We are a supply-and-demand exchange. We trade coffee, sugar, cocoa, cotton, orange juice, financials and currencies.
But the primary agricultural transactions that we transact and process do not require an electronic environment. The only one that does more than an average volume of 20,000-plus lots per day is our sugar contract. We are the international pricing mechanism for those agriculture products, as stated previously. We support a need and a niche for our industry, but we don't believe that we would require a 24-hour process. Now that's not to say that we wouldn't mind having an alliance with a Singapore or Brazil exchange for contracts that are similar in size and/or are fungible. So there are possibilities and we are looking into them.
Are there plans to allow the public to see the bids and offers stacking up -- the order book?
No, there are no plans to do that activity at all. That would really open us up to a real-time electronic trading environment, and we have not pursued that avenue, only because that type of process is not necessary for the products we trade and is not welcome on the floor. It becomes very difficult for us to make that kind of a sell. It becomes very difficult for us to make a 24-by-7 electronic system that the members of our exchange, who are the owners, would deem hostile to what they do for a living.
But you wouldn't necessarily have to have 24-7 trading to show the order book.
No, but any type of environment that would start showing the depth of market by broker, you would have to show each one of their books. Unlike the New York Stock Exchange, where you have one specialist who's handling
, we might have 30 specialists who are doing so on the floor. You would have to merge the books to show depth of market and best bid and best offer, and that would defeat what we are trying to do, which is enhancing an open outcry system.
From what I understand, the EOR is being used in all the agriculture markets except coffee. Why is it not being used in coffee?
We're making some inroads. We hope to have at least one group using coffee in the next week or so.
It's just taking a little bit longer to do the education process and to get them on board, if you will. Also, coffee is extremely volatile, and therefore caution is required in the installation of any new procedure.
One important thing to emphasize is that we are not rushing in to this in terms of deploying it. It is very important to us to support it on the floor, to provide the proper levels of support. That includes education and staff here. So rather than flood the environment and have 50 clearing members sending 200 brokers, we're trying to control the flow. We want to make sure we get the proper training on both sides and the proper support on the floor. That's why we are pacing ourselves.
Marc Dupee is an independent trader and co-author of the book
The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to
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