The 1987 stock market crash gave the Chicago Board Options Exchange a black eye that lasted for years. To ensure that the next market crash is less traumatic, CBOE brass is counting on technology.
In October 1987, when scads of customer orders were mishandled or ignored as the crisis steamrolled through the CBOE trading floor, “there wasn’t anywhere near the automation we have today,” said Gerald T. O’Connell, chief information officer. “In open-outcry, particular areas (of the trading floor) can get flooded, and that’s when automation really helps.”
These days, an alphabet soup of trading systems stands against a repeat of `87. Customer orders sent to the CBOE today might travel through ORS, BART, EBOOK, PAR, RAES, MMT and CTM.
The hardware and software behind those acronyms–ranging from retail-order matching systems to handheld electronic trading cards–make the CBOE floor unusually well-equipped. Chicago’s futures-exchange floors have nothing like it.
The upshot: reduced costs, as well as the ability to handle more trades with fewer errors, said CBOE President Chuck Henry. The exchange is spending up to $12 million on systems this year, Henry said.
For all its automation on the trading floor, though, the CBOE lacks an all-electronic trading system akin to the Chicago Board of Trade’s Project A, which operates in the afternoon and overnight.
That could change soon, sources said. A deal to list equity options on Project A is in preliminary stages. And the CBOE is planning its own daytime electronic trading system to list less-active option series, the sources said.
OTC gaining: Though he put it in the context of an unlikely merger with the Board of Trade, Jack Sandner’s worries about over-the-counter markets are becoming surprisingly common.
The Chicago Mercantile Exchange chairman said last week that big customers will increasingly bypass listed markets unless the exchanges become more cost-efficient. Many others agree, pointing to the Merc’s faded currency market as an example of OTC domination.
A few years ago, though, the sentiment was different. In a 1991 survey of futures trading firms, the Board of Trade found more than half convinced that growth in off-exchange markets wouldn’t hurt exchanges.
Some 39 percent of firms surveyed said non-exchange-traded products would boost futures volume, mainly because those OTC trades would need to be hedged. Another 16 percent said OTC products would have no impact on futures markets.
In recent years, though, OTC volume has boomed while futures volume has stagnated. As Sandner said: “Our business is not going up, and the OTC business has grown like we used to grow–exponentially. We have seen our pinnacle unless we do something dramatic.”
Clearing forecast: Could common clearing for the CBOT and CME finally be coming together? Morgan Stanley, Dean Witter Discover & Co. exec John P. Davidson III thinks so.
Last week’s pilgrimage to Chicago by Davidson and other Futures Industry Association officials “actually got down to brass tacks,” Davidson said.
“I think we’re going to be able to pull this off.” Added CBOT Chairman Patrick Arbor: “There was good movement.”
Backing PAC: By a 5-0 vote, the Federal Election Commission has approved a Board of Trade plan to make it easier for members to contribute to the exchange political action committee.
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With the July 31 vote, the path is clear for making monthly electronic deductions from clearing firm accounts.