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`Futures/Options; Automation In Trading The New York Times
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`December 10, 1984
`
`Futures/Options; Automation In Trading
`
`By H.J. Maidenberg
`
`Is the ''electronic outcry'' system of futures trading the answer to the increasing congestion on exchange
`floors, the costly rise in errors in order executions and the industry's shrinking profitability?
`
`Of course, say the officers of the first fully automated futures market, Intex, the International Futures
`Exchange (Bermuda) Ltd., which began operating on Oct. 25. Obviously, officials at the other exchanges
`think otherwise.
`
`Futures brokers, the group most affected by the problems at the exchanges, say they would prefer to
`withhold comment a while longer. But many top futures brokerage houses have bought Intex seats.
`
`''Everybody in the industry knows that the traditional system of trading futures by open outcry and hand
`signal is growing increasingly unworkable and that sooner or later the exchanges will have to move into
`the 20th century or face a complete breakdown,'' said Eugene M. Grummer, Intex's chairman. Basically,
`the Intex computer system matches the bids and offers for futures and confirms the prices at which they
`are executed on the screens of participating traders and brokers, who may then obtain a paper copy of
`the transaction on their office or home printers.
`
`David W. Graves, executive vice president and chief operating officer of the Bermudabased exchange,
`which also has offices in New York, said Intex's system offered brokers and traders several distinct
`advantages. ''First off,'' Mr. Graves said, ''whether the broker or trader is operating in a major city or in
`his snowedin ranch in Montana, he can use his computer to get swift execution and confirmation of his
`order on Intex. In effect, we are bringing the market to the user.''
`
`Because Intex's computers ''stack'' all orders, no order can be bypassed or go unfilled. Most important, all
`parties can see the ''book'' of bids and offers as well as the size of the orders on their screens for each price
`level.
`
`''Intex's system locks in the price and time at which every trade was executed,'' Mr. Graves said, ''so we
`avoid disputes over the sequence of execution. Every order, whether for one contract or a hundred, is
`executed in order. While stoploss orders can be entered, our computers do not reveal where the trader's
`stops have been placed. Finally, our 'electronic outcry' system virtually eliminates the chance for error.''
`
`Mr. Grummer added that the rising number of errors, which he attributed to both the increase in volume
`and congestion in the trading pits, often meant the difference between a broker's profit and loss.
`''Because we live in an increasingly litigious society,'' he said, ''these outtrades, our industry's euphemism
`for errors, not only are costly to correct, but in many, many cases involve costly legal expenses as well.''
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`But why base Intex in Bermuda?
`
`Futures/Options; Automation In Trading The New York Times
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`''When we began organizing the exchange several years ago,'' Mr. Grummer explained, ''there was a
`different climate in Washington. Then, the Commodity Futures Trading Commission indicated that it
`would take many years before they could rule on so innovative a trading system. Bermuda offered us
`firstrate communications and access to the London commodity markets. We do all our clearing through
`London's International Commodity Clearing House.''
`
`Asked to comment on these assertions, David T. Johnston, senior vice president and a director of E.F.
`Hutton & Company, voiced a view held by many brokers: ''Liquidity will determine whether Intex sinks or
`swims. Roughly half of an exchange's floor population consists of brokers who stand ready to take
`positions for their own account, be it for a few minutes or longer. They create the liquidity and, most
`important today, these brokers are making it possible for the markets to handle the mounting futures
`business from commercial hedgers. If Intex can develop this marketmaking liquidity, it will prosper.''
`
`John J. Conheeney, chairman of Merrill Lynch Futures and a leading advocate of reforming the current
`exchange system of trading, said: ''While I am a strong advocate of reforming the present system of
`trading futures, I don't think the 'black box' is the answer to our problem with pit congestion. At best, it is
`a noble experiment that may teach us a lot. The reason is that the Intex system lacks the vital human
`element that makes a market work.''
`
`Mr. Conheeney added that ''pit psychology,'' eye contact and the chemistry between traders, was often as
`important in determining prices as the market's technical factors and fundamentals of supply and
`demand. ''How will displaying all bids and offers on a screen affect the behavior of traders and prices?''
`he asked rhetorically. ''We will have to wait and see.''
`
`The wait may be long because Intex now only trades gold futures and it has not decided whether its next
`electronic market will be in Treasury bonds or ocean freight rates futures.
`
`At the Commodity Exchange in New York, the leading market in gold futures, one official, who requested
`anonymity, said: ''Intex's concept and execution system is very good, but thus far they are trading about
`300 gold futures a day, while Comex handles about 30,000 contracts. Perhaps it would have been wiser
`for them to have chosen an entirely new product, rather than try to compete with a well established
`market. We wish them well nevertheless.''
`
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