Futures Shock Are trading floors obsolete?

By THOMAS McCARROLL

With their flashing boards and shouting traders, the frenzied floor pits of the world's stock and commodities exchanges are a symbol of the human side of the financial marketplace. But they are fast becoming a quaint anachronism. The British and French stock markets are completely computerized, the Toronto exchange plans to shut down its trading floor by the end of the year, and the Japanese, Koreans and Germans are rapidly moving in that direction. Now comes one of the biggest steps toward a global computerized marketplace: this week Reuters and the two major Chicago commodities exchanges plan to launch a system called Globex, a 24-hour electronic trading system for futures and options contracts. Eventually it and similar systems could handle stocks, bonds and any other trades, virtually eliminating the need for trading floors in New York City and other financial capitals.

Four years and $70 million in the making, the Globex system is a bid by the Chicago Mercantile Exchange and the Chicago Board of Trade to keep from losing yet another homegrown industry: futures trading. U.S. exchanges developed modern-day futures, including popular contracts based on Treasury bonds and the Eurodollar. By the late 1980s, however, copycat exchanges from Auckland to Zurich were able to establish their own futures markets by trading when Chicago was closed for the day. Last year the U.S. share of the worldwide futures business had slipped to about 50%, compared with more than 90% in 1985.

The Chicago exchanges are betting that foreign traders will flock back to the U.S. through Globex. So far, the London and Paris exchanges have signed up to use the system; the Tokyo, Frankfurt, Hong Kong and Zurich exchanges are expected to follow suit. Says Globex chairman Leo Melamed: "This is a way to extend our market around the globe across all borders and time zones."

When a customer now buys or sells futures, he calls his broker, who phones the order to the trading desk, which turns it over to floor traders in the pits. They, in turn, haggle over the best price for the order, which is then tallied and recorded. The whole process takes upwards of 20 minutes. With Globex, the floor traders and pits are completely bypassed. Prices are set by a computer match with incoming orders. Execution time: three seconds.

Since the system could one day be easily modified to trade stocks, Globex could further obliterate the distinctions between futures and stock exchanges and result in a new world order of financial markets. Says John Sandler, chairman of the Chicago Merc: "We can become a securities exchange. There's nothing to stop us from doing that."

That kind of talk worries officials at the New York Stock Exchange; trading technology is advancing so rapidly that the Big Board could be bypassed by such new high-tech systems as the Arizona Stock Exchange, the NASDAQ and now Globex. The N.Y.S.E. petitioned the Securities and Exchange Commission to slow down, if not unplug, some of the networks. Says William Donaldson, chairman of the N.Y.S.E.: "To our competitors, we're the big monster; and it's fun to zap the monster."

For investors, the biggest concern involves the hazards of entrusting huge and sensitive financial markets so totally to computers, notoriously prone to breakdowns and break-ins. Warns Fred Shipley, professor of finance at DePaul University: "A computer bug could bring the capital markets to a crashing halt." Last month, for instance, a minor computer failure at the Chicago Board Options Exchange shut down trading for about 90 minutes. Although the Commodity Futures Trading Commission has tested Globex to its satisfaction, it cannot guarantee that the system will be fail-safe. Concedes chairman Wendy Gramm: "We haven't thought of every contingency."

In addition, instantaneous electronic trading, particularly on a global scale, could increase the volatility of markets in the same way that computer- generated program trading has done. Filtering trades through human hands and minds might be slightly sluggish and inefficient, but it can serve to add an element of stability (and occasionally even a moment of rationality) to a marketplace. Says Albert Sindlinger, who runs a Wallingford, Pa., investment- research firm bearing his name: "If the past is any indication of what computers will do to markets in the future, then we may all be in big trouble."

None of these qualms, however, are likely to slow the relentless race toward global electronic trading. If handled correctly, the new systems could lead to markets that are more efficient and easier to monitor and police for fraud. In any event, the scenes of traders wildly waving pieces of paper from the floor pits will give way to those of traders around the world furiously typing orders into computers.

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CAPTION: HOW GLOBEX WORKS