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With the follies at the Nymex/Comex this week, the inking of the Eurex/CBOT
deal and the announcement by the MGE they will enter into an agreement with a
company called ePit to develop an electronic commodity exchange, could this
week have been the turning point for the end of open outcry trading in the
U.S. as we know it.
The Nymex/Comex was ill-prepared for the huge explosion of order volume they
saw this week. They seemingly have had their heads in the sand as the
Internet
revolution and technological advancements have brought new demands upon the
efficiency of their markets.
They have seemingly ignored the success of the E-mini S&P contract at the
CME, which not only helped ease the flow of customer paper into and out of
the big S&P 500 pit, but has attracted masses of new traders into the futures
markets. For example, why has the Nymex/Comex not started side by side
trading with their ACCESS electronic trading system during the day, or better
offered a smaller size contract on it running side by side with the big pit
traded contracts. I believe this approach has added liquidity to the S&Ps,
not stolen volume from them. While a Nymex/Comex approach would be somewhat
more similar to the un-robust CBOT Project A offerings during the day, it
would at least give the exchange another avenue to handle explosions of
volume. Open ACCESS up to the FIX API the CME is introducing (if possible?)
and suddenly the Nymex/Comex has opened their markets to electronic futures
traders around the world in a meaningful way.
Electronic traders do already have access to the Nymex/Comex, but the
efficiency ends at the point where the human brokers can not handle the
volume of order flow. The Nymex/Comex, to my knowledge, has done nothing to
technologically enhance the open outcry efficiency. At the CBOT there are
about 100 Electronic Clerk (EC) terminals which aid brokers and clerks in
managing the customer orders, easing execution, and speeding reporting of
fills. In fact, my CBOT floor manager this week told me he has an EC pilot
program in the Corn options, where this terminal is receiving only straight
buy and sell corn option market orders. That is a first, to my knowledge.
At the CME, they are behind in their unofficial goal to put 200 CUBS2
terminals in by the end of 1999. However, I can now route orders to 5
different CUBS2 terminals on the CME floor and the list is growing every
month.
In the old days the flow of orders was limited to the number of phone clerks
on the trading floor and the speed they could take orders. It was also
limited by the number of floor runners and their ability to get orders into
the brokers quickly and return to the desk for more orders. Sometimes
runners would stack up getting into a particular busy broker, thus the flow
of orders was regulated by this physical limitation.
With Internet order routing systems routing orders to New York, the flow of
orders to the trading floor is a function of the number and speed of order
printers on the trading floors. Those printers and computer systems can
quickly send hundreds of orders to the trading floor within minutes. From
there though the Nymex/Comex did not and does not have a technological tool
to help manage this order flow. They could throw more human beings at the
pits, pull clerks and runners off of other pits and desks. I am sure there
was plenty of this people shuffling going on at the Nymex/Comex this week,
but during the largest volumes it could not meet the challenge.
Clearly to me, the Nymex/Comex needs to technologically advance the
efficiency of their open outcry trading, or their black eye this week will
speed the demise of open outcry trading at all U.S. exchanges. The
Nymex/Comex failure to efficiently perform this week for the retail traders
presents an opening for a would be predatory exchange or e-alliance. Once an
existing or new exchange shows it can steal the business of an open outcry
market here in the U.S., momentum will be increasing for more markets to
switch to electronic trading or have volume stolen from existing markets.
Here is my suggestions for the Nymex/Comex:
1) Enhance open outcry trading by opening the exchange to the entrance of
Electronic Clerk or CUBS2 terminals from the CBOT and CME to connect them to
existing TOPS networking in place.
2) Create a ½ sized gold and silver contract and trade them on ACCESS 23 ½
hours during the trading week.
3) Give away free quotes for your ACCESS contracts.
4) Develop an open API for ACCESS to open the system up to Internet order
routing systems.
5) Promote the heck out of these contracts on the Internet.
6) If you can’t do these things by yourself in a timely manner, think about
merging with another exchange that has the technological ability already. It
is not enough today just to transform yourself into a for-profit corporation,
you must have the strategic partners, capital and mass to effectively
compete.
7) At least forge an alliance with another exchange to get access to better
technology if you can’t bring the necessary products to market in a timely
fashion. It is better to make some new alliances than have competitors
develop competing products you can’t match.
The Nymex/Comex must understand they don’t exist in a vacuum. The gold and
silver markets are nearly as old as human civilization. Every country uses
petroleum products. Today more of the world’s population has inexpensive
access to futures prices than ever before in history, via free and fee-based
Internet sites and services. The traders who have flocked to the stock index
trading in then last 18 + years and are now trading via the Internet or
through technologically equipped brokers are clearly familiar with the
traditional gold and silver markets. All it took to attract some attention
to the gold and silver market was the first substantial bull move in 13 years
on Monday.
I will admit that the almost continuous bear market in gold for the last 13
years left a lot of people with low expectations for this market. On Tuesday
driving to the train I heard some analyst/trader being quoted on the radio
as saying the market action on Monday suggested that by the end of the year
Gold could be trading at $300 per ounce. It actually took only 26 minutes of
trading on Tuesday until the December contract traded there. Yowza!
The world has clearly changed because of the technological advancements and
accompanying cost barrier reductions. Millions of people can and have
visited futures exchanges cyber visitor galleries via the Internet. The huge
spikes in the E-mini S&P on Fed announcements and government reports should
be a sign of the power of the global public’s interest in our markets and a
warning about the inefficiency of the physical limitations of open outcry
trading. If this kind of interest in the e-mini S&P continually has this
type of effect during key moments, how can un-enhanced open outcry trading
compete during similar surges in trading interest? I don’t think it can.
Lets hope the Nymex/Comex can put aside traditional territorial political
concerns and enhances their open outcry trading before their follies turn
into a trend and speed the end of open outcry trading in the U.S. as we know
it. I acknowledge the inevitability of the dominance of electronic trading,
but am hoping for a smooth transition rather than a disruptive one.
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it!
Disclosure: John J. Lothian is the President of the Electronic Trading
Division of The Price Futures Group, Inc., an Introducing Broker.
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