The End of Open Outcry
Kayvon Pirestani
Issue date: 5/27/04 Section: Perspectives
The first is speed. Modern electronic limit order books (such as Tokyo's) match trades in milliseconds. Compare this to the average turnaround time of 36 seconds for a trade on the Chicago Board of Options Exchange.
The second advantage is cost. Daniel Hodson, the former head of LIFFE, London's derivatives exchange, estimates that electronic trading is 20-30% cheaper than trading pits. This should not be surprising given that electronic markets don't have to pay for floor traders, clerks, assistants, or any of the other overheads required for open outcry. It's no wonder that big, cost-conscious institutional investors such as Fidelity are some of the biggest proponents of electronic trading.
The third advantage is robustness. Although the open outcry system is less error-prone than the casual observer might guess, electronic systems make far fewer mistakes, and there are no "he said she said" disputes in the electronic world as there are in the pits. What's more, in this post-9/11 era, electronic systems are more resilient to catastrophes than trading pits; most electronic exchanges have parallel off-site facilities that can be activated within minutes.
Given the inescapable advantages of electronic trading, why, then do many of the U.S. exchanges stubbornly cling onto the open outcry system? The reason is simple. Those who are most vocally against moving to electronic trading are precisely those with the most to lose from any switch. The CME and CBOT are owned mainly by "locals", small trading outfits that thrive on the inefficiencies of pit trading. Most locals are opposed to computer trading for the simple reason that it will reduce their profits or even put them out of business. "Open outcry is good for the guy on the floor," says Benn Steil of the Council on Foreign Relations in New York. Such resistance, however, is unlikely to stand up to the rising tide of competition, as exemplified by Eurex's all-electronic entry into the U.S. markets.
The second advantage is cost. Daniel Hodson, the former head of LIFFE, London's derivatives exchange, estimates that electronic trading is 20-30% cheaper than trading pits. This should not be surprising given that electronic markets don't have to pay for floor traders, clerks, assistants, or any of the other overheads required for open outcry. It's no wonder that big, cost-conscious institutional investors such as Fidelity are some of the biggest proponents of electronic trading.
The third advantage is robustness. Although the open outcry system is less error-prone than the casual observer might guess, electronic systems make far fewer mistakes, and there are no "he said she said" disputes in the electronic world as there are in the pits. What's more, in this post-9/11 era, electronic systems are more resilient to catastrophes than trading pits; most electronic exchanges have parallel off-site facilities that can be activated within minutes.
Given the inescapable advantages of electronic trading, why, then do many of the U.S. exchanges stubbornly cling onto the open outcry system? The reason is simple. Those who are most vocally against moving to electronic trading are precisely those with the most to lose from any switch. The CME and CBOT are owned mainly by "locals", small trading outfits that thrive on the inefficiencies of pit trading. Most locals are opposed to computer trading for the simple reason that it will reduce their profits or even put them out of business. "Open outcry is good for the guy on the floor," says Benn Steil of the Council on Foreign Relations in New York. Such resistance, however, is unlikely to stand up to the rising tide of competition, as exemplified by Eurex's all-electronic entry into the U.S. markets.