In Defense of Open Outcry
Lance Weislak
Issue date: 5/27/04 Section: Perspectives
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Fundamentally, the arguments of opponents of open outcry systems rely on two basic assumptions: that something newer is always better than something older, and that something computerized is always better than something done by a human. Unfortunately, these unquestioned assumptions lead some people to want to destroy some of the largest, most liquid, most efficient, and most successful trading systems in the world by replacing them with all electronic trading.
Before we're blinded by the glitz and glamour of new technology and its army of highly polished IT consultants, it's worthwhile to take a step back and reexamine some these assumptions as well as consider some new points proponents of electronic trading never bring up.
Let's start first by tackling some of the assumptions of the open outcry system:
Assumption # 1: The open outcry system uses too many people; computers are cheaper.
You may think that with all the people running around a trading floor, the open outcry system must be more expensive than electronic trading, but it isn't. In an electronic system, all the people you see on the trading floor are still present except you don't see them. They are simply sitting behind computers screens in dozens of different locations. Sure, you may save on a few dozen floor runners, but remember, the few dozen floor runners you fire at $30,000 dollars per year will end up being replaced by legions of IT consultants and engineers at $100,000 per year or more.
Further, the majority of trading costs are due to back office and clearing work. Opponents of the open outcry system (read: IT consultants) often like to portray it as people shouting outside under buttonwood trees, writing with fountain pens, and using abacuses to keep track of accounts. Nothing could be farther from the truth. In fact, open outcry systems are already highly electronic and computerized. All of the cost savings that arise electronic trading have largely been realized in the open outcry system through the automation of back office and clearing work. The Merc itself has spent over $500,000,000 in the last decade on technology upgrades to automate all the work that could be automated.
Before we're blinded by the glitz and glamour of new technology and its army of highly polished IT consultants, it's worthwhile to take a step back and reexamine some these assumptions as well as consider some new points proponents of electronic trading never bring up.
Let's start first by tackling some of the assumptions of the open outcry system:
Assumption # 1: The open outcry system uses too many people; computers are cheaper.
You may think that with all the people running around a trading floor, the open outcry system must be more expensive than electronic trading, but it isn't. In an electronic system, all the people you see on the trading floor are still present except you don't see them. They are simply sitting behind computers screens in dozens of different locations. Sure, you may save on a few dozen floor runners, but remember, the few dozen floor runners you fire at $30,000 dollars per year will end up being replaced by legions of IT consultants and engineers at $100,000 per year or more.
Further, the majority of trading costs are due to back office and clearing work. Opponents of the open outcry system (read: IT consultants) often like to portray it as people shouting outside under buttonwood trees, writing with fountain pens, and using abacuses to keep track of accounts. Nothing could be farther from the truth. In fact, open outcry systems are already highly electronic and computerized. All of the cost savings that arise electronic trading have largely been realized in the open outcry system through the automation of back office and clearing work. The Merc itself has spent over $500,000,000 in the last decade on technology upgrades to automate all the work that could be automated.