Watch for a big revision in the circuit breaker rules that shut down U.S. securities markets when the Dow Jones industrial average plunges.
A change could come as soon as the first quarter of next year, said Chuck Henry, president of the Chicago Board Options Exchange.
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At a meeting Friday with Securities and Exchange Commission Chairman Arthur Levitt, U.S. exchange leaders strongly favored a bigger range for circuit breakers, Henry said.
For his part, Henry said he believes the first, half-hour shutdown should come after a drop of 400 or 500 Dow points, instead of the current 350. Even more important, the second, hourlong break now triggered when the Dow falls 550 should come only if it falls another 400 or 500 points after the first break, he said.
The issue moved to the front burner when the Dow’s 554-point drop on Oct. 27 forced the exchanges to close, even though trading was orderly.
LIFFE light? The center of innovation in the futures industry might be shifting away from Chicago.
As last week’s Futures Industry Association conference made clear, many critical issues are playing out in Europe. In the battle between screen-based trading and traditional open outcry, the London International Financial Futures Exchange is mapping strategy that could have broad implications for exchanges here.
Ironically, the cornerstone of LIFFE’s efforts to protect its open-outcry market could turn out to be one that Chicago’s exchanges have tried and rejected: Handheld trading computers.
Real-time trade matching through compulsory use of handhelds could be the key to making open outcry as cheap and efficient as screen-based systems, said LIFFE chief executive Daniel Hodson.
Sounds good, but Chicago’s exchanges gave up on handhelds several years ago after spending $20 million on a failed prototype.
LIFFE is undeterred. It is reviewing cheaper, off-the-shelf technology that could work in futures pits, Hodson said. If handhelds can eliminate the paper chain of written orders and trading cards while also preventing costly errors, he said, “that’s the Holy Grail.”
LIFFE is hedging its bets by developing an upgraded, high-capacity electronic trading system as well.
Clearing cloudy: After years of debate over a proposal to save money by matching and guaranteeing trades together, Chicago’s futures exchanges this week are holding another summit on the topic.
Going into a negotiating session Monday evening, the key players were committed to the principle of common clearing, but divided on the issue of governance and control over any new system.
The British, meantime, already have solved that problem. Member firms own three-fourths and the exchanges one-fourth of the unified London Clearing House.
The London clearing model won’t work for Chicago because it would take too much power away from the exchanges. And it’s possible Chicago may not be ready for unified clearing even now.
Consider, for example, the prediction of Jerrold Salzman, the Chicago Mercantile Exchange’s outside counsel: If clearing systems were combined, the advantages from economies of scale enjoyed by large exchanges such as the Merc and Chicago Board of Trade would evaporate, Salzman explained at a panel discussion last week.
Because big exchanges would remain the focus of excessive regulation, he said, smaller, specialized, electronic exchanges would own the future.
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