Satu S. Parikh

Finance Department

The Wharton School of the University of Pennsylvania

1300 Steinberg Hall, Philadelphia, PA 19104-6366

LITZ2@finance.wharton.upenn.edu

Abstract

The primary concern in designing an interface for an electronic trading system is the impact on market liquidity [9]. Current systems make use of efficient order-execution algorithms but fail to capture elements of the trading floor that contribute to an efficient market [9]. We briefly describe tasks conducted in futures pit trading and current off-hours electronic trading systems. Understanding the tasks helps define key components to an interface for electronic trading. These include visualization of the market and its participants, a trading process which allows active participation and price discovery as well as concurrent interaction among each of the participants.

Keywords:

Futures trading, automated exchange, trading pits, interface design, electronic markets

Introduction

In the futures pits of the Chicago Mercantile Exchange (CME), tens of thousands of people crowd into 70,000 sq. ft. and trade in excess of 550,000 contracts a day by using their voices and hands. Even this volume is pale in comparison to the total dollar volume of all futures contracts worldwide, which are over $500 billion a day [12]. In comparison, the electronic automated counterpart to the Exchange, the GLOBEX Trading System, trades only 6,000 contracts daily. [GLOBEX] is just nickel- and-dime small investor retail business so far, says a portfolio manager at a large New York investment firm. Another person familiar with exchanges and trading, Mr. Dale Lorenzen, first vice-chairman of the Chicago Board of Trade, readily admits, I just don’t think GLOBEX is ready to take the volume that we can generate with open outcry. Why an electronic system cannot effectively replicate the human component of floor trading, highlights some important interface design issues.

The CME currently has some of the most crowded futures pits in the world. Imagine you are a trader in such a futures pit, and your task is to sell 100 soybean contracts at a given price. You scream in as loud a voice as possible, 100 for [price] while simultaneously touching a closed fist to your forehead with palm facing outwards. Within seconds a person wishing to buy a hundred soybean contracts indicates a desire to buy but wishes to lower the price. Some negotiation takes place, and once an acceptable price is found, the trade is executed. The average trader on the CME executes 60 trades an hour.

There are a number of existing attempts to automate some of the most liquid financial and commodity markets in the world, and the results have been less than desirable. GLOBEX, a joint venture between Reuters Holdings PLC and the CME, is one example. Two years after its introduction, the system has been described as restrictive, slow, and inefficient relative to the open outcry method of trading, and there has been a great deal of debate about why this is so, or rather why this should be so [14]. In spite of the many reasons why a floor-based system is better than its screen-based counterpart, from an interface standpoint the superiority of the trading pit structure is readily apparent.

The trading pits are where all of the dealing in a particular futures instrument is legally required to take place [2, 10]. More specifically the Commodity Futures Trading Commission’s Regulation 1.38 states the following [6]: All purchases and sales of any commodity for future delivery, and of any commodity option. shall be executed openly and competitively by open outcry or posting of bids and offers by other equally open and competitive methods in the trading pit or ring or similar place provided by the contract market.

In these pits, the traders’ shouts and hand signals form a complex network of communication that may seem uncontrolled and chaotic, but which is, in fact, remarkably orderly. One may postulate that with a computerized trade execution system, communication between traders can be provided by showing the best bids and offers in the market for a specific contract at any particular moment, thus eliminating any need for hand signals and/or verbal communication. This is true, but what needs to be considered and explained is that by removing the human element in a trade, the efficiency of price matching may increase but only at the expense of market liquidity, which is defined as the ability to execute an order of any size without a significant discrepancy to the market price [3]. Thus, the electronic automation of futures markets has definite interface design issues, namely effectively replicating the communications bandwidth of floor-based futures trading in an electronic securities market. It is important to note, however, that the intent of this research is not to provide decision support for those traders engaged in open outcry. Rather, it is directed towards addressing interface design problems and issues in screen-based futures trading.

To understand why the existing computerized trade execution systems fail to substitute for an open outcry market, one must first understand the basic market principles as well as some details about how different orders are executed. Thus, section 1 begins with an overview of the futures markets. Section 2 delves into aspects of screen-based futures trading systems currently in operation with a primary focus on GLOBEX. While other systems are currently in operation [12], GLOBEX is the highest volume electronic market and is the most widely used for after-hours trading [9].

Section 3 looks primarily at the interface considerations of both the floor and screen-based trading systems. Here the different problems are stated and explained, and possible ways to increase the communications bandwidth in an electronic futures market are explored. Section 4 describes the components of a prototype we are developing that represents the beginnings of a solution to this very difficult interface design problem.

FUTURES MARKETS

A futures contract is simply an agreement to buy or sell a given amount of a commodity or financial instrument at a particular price on a stipulated future date. Common contracts are crude oil, precious metals, agricultural goods, interest rate instruments, and currencies. Each is traded on an exchange, and some are traded on more than one. Futures contracts are used for hedging, speculation, and market making.

Hedging is used to offset the risk exposure from potential future cash market transactions in the product. For example, large multinational corporations may use currency futures to hedge against a future payment in foreign currency or lenders may use interest rate futures to hedge against a future fall in rates.

Obviously futures are very useful in reducing market risk, but they may also be used as speculative instruments. Arbitrage is exploiting small discrepancies in different markets. By having positions in both the cash market and the futures market, one could earn a riskless profit if market inefficiencies arise.

Market making is not specific to futures, but the way it is implemented is unique to the futures markets. Making a market involves taking both sides of a trade and profiting off of the spread, which is the difference between the buy (bid) and sell (ask) price. In most futures exchanges, market makers, also called floor traders or speculators, are those trading for their own account as opposed to filling an order for a customer. Thus, it is the market maker who supplies much of the capital that ensures a liquid futures market.

Order Execution

The actual trade is executed in a ring shaped pit. The buyer, wishing to invest a given amount of money in a particular contract, places an order with a member firm (e.g. Lind-Waldock Futures Inc. Merrill Lynch, etc.). In placing the order, the buyer may set certain restrictions on the order such as price limit, market, or opening only [16]. The member firm communicates the order via telephone or computerized order-entry to its clerks on the exchange floor. The order is time-stamped for order-clearing purposes, and then a runner delivers it to the firm’s floor broker in the trading pit. Using open outcry, the floor broker shouts the order into the pit. As there are many brokers and traders shouting in these pits, shouting alone may not accurately convey intentions to buy or sell. Thus, hand signals are an integral way in which a pit trader or broker communicates with the rest of the pit participants.

Once the broker has indicated the buy order, other brokers with sell orders or market makers wishing to create or close out a position may choose to sell the required contracts to the buyer-represented broker. If the broker wishes to buy a large quantity of contracts, she may enter into a number of trades with different brokers in order to fill the order. At any rate, once the order has been filled, the broker writes the seller’s identification number and the details of the trade such as the time, price, and quantity on a trade ticket. Once the trade is executed, exchange employees relay the price to the exchange’s computerized price reporting system. In relaying the information, the exchange’s employees use a variety of methods. The CME uses mobile phones; the New York Cotton Exchange uses hand-held computers; and the Coffee, Sugar and Cocoa Exchange employees use hand signals to report prices to other employees entering the price data into a computer. This information is then transmitted to market observers and participants worldwide, thereby allowing people around the globe to trade with relative ease.

The last step in the execution process is confirming the trade. A runner returns the filled order to the member firm’s communications desk, where it is once again time- stamped. Confirmation of the futures purchase is then sent to the customer.

Order Clearing

After an order is filled it must be cleared by the respective exchange’s clearing agent. The CME’s Clearing House is the guarantor of performance for each futures contract traded. This means that the timely delivery by the seller of the exact quantity and quality of the commodity or financial instrument and the full and timely payment by the buyer, are fully ensured by the Clearing House. In addition to monitoring the physical delivery process, the clearing agent oversees the daily settlement of all accounts. This means that if an unliquidated (open) position exists at the end of the day, it must be marked-to-market. Marking to market involves recalculating the value of the position using that day’s settlement price. Any loss in value is treated as a debt to the clearing agent which must be repaid, and any increase in value is credited to the customer’s account.

In understanding the different interface implications in automating the futures market, one must be familiar with how and why such a market functions. The next section explains the GLOBEX system and other automated securities markets.

AUTOMATED SECURITIES EXCHANGES

Rapid development in technology has permitted the move from floor-based markets to screen-based systems, and one such system currently in operation is the Global Exchange (GLOBEX) Trading System. More specifically, GLOBEX is an international, automated order entry and matching system that is operated by Reuters Holdings PLC and the CME. The GLOBEX Network extends to ten financial centers, including New York, Chicago, London and Tokyo. At present, more than 325 trade terminals are in operation. The system operates after the close of the regular trading hours and closes just prior to market open [7, 9]. Types of Orders Available

Primarily, two types of orders are given, market and limit [11]. A market order instructs the floor broker to execute the trade at the current market price or better with no restrictions on price. While a limit order, restricts the broker to a given price or better in her bidding or offering. Many view GLOBEX to be restrictive in placing different types of trades, since GLOBEX only permits limit orders to be entered. A trader at a GLOBEX terminal chooses the contract he wishes to trade in, and then enters an order, which is ranked by a price/time priority algorithm and stored in a limit order book. The trade is executed when the prices cross.

GLOBEX offers two trade options, hit and take, which are akin to market bids and offers, but the GLOBEX alternatives differ from market orders distinctly. Hit orders, when entered, place a sell order at the best bid price, and take orders place a buy order at the best offer. Both are supposed to duplicate market orders. The difference, however, lies in reconciling the quantity of contracts specified in the orders. On the floor, market orders are either filled in entirety or in part. If they are only partially filled, the broker can continue to trade the remaining contracts at the current market prices. On GLOBEX, hit/take trades are filled to the quantity of the standing order, and the remaining balance is automatically canceled.

Another way a market order is constructed on GLOBEX, is by entering an order at a better price than the best standing order. Thus, the new order is immediately executed at the best bid or offer. If the newly entered order is for a large quantity, the system moves through the book, providing fills at the best prices, until the order is filled or the limit price is reached.

PROBLEM DEFINITION

The problem in electronic securities exchanges is the fact that by automating the trade process, the human element is forgone. While the efficiency of trade clearing and order matching may increase, the added liquidity, provided by those willing to trade on the human element (i.e. noise traders), is sacrificed. The question at hand is how to improve the human interaction in these automated trade systems.

Current GLOBEX Interface

The current interface for GLOBEX (Figure 2) uses a windowing technique which subdivides the area of the screen into windows: trading window, response window, full ticker window, request for quote (RFQ) and alert window, monitor window, and the limit order book. While this setup may be adequate in displaying one window of information, it is difficult to view information across multiple windows. Further, the interface slows the entry of trades relative to open outcry and it would be difficult to enter, let alone execute, 60 trades per hour using GLOBEX.

The trading window is where a trader finds the best bid and offer available for a GLOBEX product. As it contains the most information, it is the largest of all the windows, comprising nearly a third of the entire screen. It contains the current contracts being traded as well as their best bids and offers. The quantity and last trade price are also displayed along with the high, low, and volume for the current trading session. The trader may modify a portion of this window in order to show the total number of his orders entered as well as his last bid/offer.

In addition to displaying the market for a given contract, the trading window is where trades are entered and modified. Assume the trader’s intentions are to place an order to sell a notional amount of a given product listed on GLOBEX. First, he must depress the number key representing the contract or use the mouse to select it. Once this is done, a dialog box appears giving the trader a number of alternatives. More specifically, he may bid/offer the contract thus making a market, separately bid or offer the contracts, hit/take the best bid/offer, change or cancel an existing order, request for quote, or display the order book which only shows the five best bids/offers. Assuming this trader wishes to sell his contracts, he would use the keyboard’s arrow keys coupled with the enter key or the mouse to select the offer button. The trader must now grapple with another dialog box requesting the details of the trade, such as the offer price and quantity. After all information has been entered as desired, the trader clicks the OK button, thus entering the trade into the limit order book. The trade is subsequently ordered by GLOBEX’s price/time priority structure and is advanced in the execution queue as trades are executed.

Trades take five seconds to enter for hit/take orders and ten seconds for regular bid/offer limit orders. Use of the mouse in trading generally speeds up the order entry process. By allowing traders to quickly select choices instead of typing, order entry using a mouse is 30% faster than a keyboard.

The response or trading mailbox window is smaller than the trading window. This window enables the trader to receive messages from the central or host computer, including order acknowledgments, executions, and respective order numbers.

The ticker windows lies to the right of the trading mailbox. It displays the most recent market movements providing an updated message each time a trade occurs and each time there is a change in the price or size of the best bids and offers. The ticker employs a vertical scrolling technique in updating market information. Each time there is relevant information, it is displayed from the top of the windows and each successive new piece of trade information is updated below. Thus, the window does not actually scroll but rather updates and overwrites old information.

GLOBEX also utilizes a monitor window, which contains information from the cash (spot) markets. An option allows the trader to show those futures’ and/or options’ prices from those traded in the trading windows. The trader may also view a number of indices and market composites which are provided by GLOBEX as well. The Request For Quote (RFQ) and Alert windows alerts the trader when the price of a selected instrument has reached a preset level. GLOBEX permits alerts in all of its listed products. Another feature, which is appealing for thinly traded contracts, is the RFQ. If a contract in which a trader wishes to transact in is not being traded, the trader may ask the market for a quote by clicking the appropriate button on the particular contract’s aforementioned dialog box. This is broadcast to GLOBEX screens around the world. Others wishing to trade or perhaps make a market in the contract may then choose to respond with a bid or offer in the requested market. GLOBEX is efficient in clearing and matching trades according to its price/time priority algorithm. However, the system is inadequate in maintaining an active and liquid market. This is partly due to the nature of after- hours trading, but much more attributable to the system’s inability to recreate the human-to-human interaction present in the trading floor environment. This interaction is forgone (1) by GLOBEX’s method of order entry and matching, and (2) by the system’s interface.

Order Execution Algorithm

The rules of an automated trade-execution process are referred to as an order-execution algorithm [11]. For example, GLOBEX uses an automated continuous double auction, in which transactions take place when limit prices cross. For the continuous double auction process, a standing price/time priority structure is used. That is, bids (offers) are assigned priority in the limit order book from the highest (lowest) price to the lowest (highest) price. Orders of equal prices are given priority according to the time of entry. When order prices cross, the trade occurs at the lower of the two quantities specified in the orders. The following brief example illustrates this process. Assume the following chronologically successive bids and offers for a specific futures contract:

At 10:30 the best buy order is at the price of 1.55 while the best sell order is for 1.64 per contract. Since order prices do not cross, no trade execution is possible. Note that the spread between the best bid and offer is .09. This simply signifies that the cost of buying while simultaneously selling a notional amount, would cost .09 per contract. At 10:35 the best offer is entered at 1.59 per contract, while the best bid stands at 1.605. Since the best offer is less than or equal to the best bid and, conversely, as the best bid is greater than or equal to the best offer, the trade is executed at the standing order’s price of 1.605. Since the quantities are not equal, only 50 of the 95 contracts are executed at the bid price. The balance, at the trader’s request, may remain as a standing order or simply be canceled. At 10:35, immediately after the trade has been executed, the order book would look as follows:

A new best bid is entered at 10:36 at the price of 1.63. Since this crosses with the best offer, another trade is executed. However, as there are two offers at the price of 1.63, GLOBEX makes use of the time priority to distinguish the orders. Since both orders occurred at different times, the offer entered first is given priority. Thus the new bid is executed at standing price of 1.63, and since the existing offer is for 35 contracts, this is the number of contracts traded. Assuming the trader entering the order did not want the balance canceled, the remaining 10 contracts would be executed against the new best offer of the same price for 70 contracts. Thus, the order book would look as follows after the new order-entry at 10:36 and the two new trades occurring immediately after 10:36.

As new orders are entered, they are prioritized in the book as described, and if matching is possible, the trade is executed at the standing price. Reconciling the quantity depends on the trader’s instructions. If the balance is left as a standing order, it remains in the order book and is executed as illustrated above; otherwise it is simply canceled.

Orders may be modified on GLOBEX. Traders may change the price and/or quantity of an existing order if it has not yet been executed. However, by modifying an existing an order, time priority is lost. The system views order modification as equivalent to canceling the existing order and entering a new one. This may prove costly in a high volume market, where many orders exist for a given price.

Discussion of Order Entry and Matching

An understanding into why GLOBEX hinders an efficient and liquid market thus requires discussion into some of the previously published ideas about the inadequacy of trade automation. The two primary reasons explored are the importance of traders or locals and the psychology of a futures pit[14].

Locals and Traders

The trader is integral to a properly functioning market. Trading for their own accounts, they have a great deal of flexibility in deciding how their money is allocated. Some choose to assume no risk by taking both sides of the market and profiting from the spread (i.e. scalper or market maker). Others incur some risk by playing natural market movements (i.e. spreader, arbitrageur, or position trader). Whether some or a great deal of risk is borne by traders, they are infusing the markets with a large supply of liquid reserves, and it is these liquid funds which result in commitments to a newly listed futures contract or option as well as the long term viability of an established market.

Although GLOBEX allows market making it does not have the communications bandwidth necessary to trade actively in a liquid market. As an illustration, assume two markets, GLOBEX and a floor based exchange. In addition assume a market maker wishes to place a bid and an offer for a highly liquid contract. On the floor this trader using the open outcry method of trading can indicate her desire for both orders in tandem. Using hand signals she can place the order in a few seconds. On GLOBEX the trader would have to grapple with the contract’s dialog box which does allow a BID/ASK option. After entering a specific bid, offer, price and quantity, the order is entered into the limit book where it is ranked according to the price/time priority algorithm. Clearly, this would take much longer than simply waving and shouting one’s desires. Speed, however, is not the only issue of import in distinguishing between the two systems. Versatility is equally substantial. If the market begins to move away from the trader, on the floor she can simply modify her hand gestures and shouting to account for this. On GLOBEX it is not as easy. The trader can clearly change her order, but not without relinquishing time priority in the queue. In a liquid and volatile market, forfeiting an advantageous place in the order queue may result in an unconsummated order.

One also has to be aware of the aforementioned communications bandwidth present on the floor of an exchange. In a specific pit, a trader can view the whole market in front of him. He can select an appropriate price and trade immediately. In addition, it is not imperative that he trade with someone in physical proximity, the trader can choose someone across from him or anywhere in the pits. This is because the system of hand gestures is so efficient, traders can signal intentions and desires at an instant to a large number of people.

Pit Psychology

Less quantifiable than a high volume and liquid market are the psychological issues unique to the trading pit and how these are to be replicated on a screen-based trade system. Many traders, experienced with both the pit structure as well as GLOBEX, assert that on the floor there is information meaningful to the negotiation process which cannot be found on GLOBEX. One example is noise or information trading. This refers to the increased noise in an extremely active market. Traders sometimes choose which pit and its respective contract to risk their money in by the noise associated with it. On a screen based system such as GLOBEX there is no way to hear price movement. There is no replication of the hundreds of shouting voices, waving hands, or stamping feet that one commonly sees on the trading floor. Thus, it can be argued that this lack of auditory and visual stimuli on GLOBEX may preclude some involvement by traders seeking profit.

Another example of the pit psychology is available in Leo Melamed’s Critique of Automation [14]:

There is yet another type of liquidity which is exclusively a product of the floor, or rather of the pits. This liquidity is the product of pit psychology. For example, pit trader A, a larger trader who trades solely for his own account, is about to enter the pit. Pit trader A is known to have �bought the market’ earlier that day or the previous day. The market has fallen during the last thirty minutes. As pit trader A enters the pit, but before he has indicated any bid or offer, he is seen by pit traders B, C, D, and E, who also trade for their own accounts. Pit trader B, a fairly large local trader, is short the market. His split second reaction is that A will no doubt continue buying the market and perhaps cause the rally. Thus, he immediately buys to offset some of his shorts in an attempt to secure some of his profit. Pit trader C, a fairly large local trader, who is long the market and is presently with losses and nervous about his position, reacts entirely differently. He feels that trader A is about to sell and liquidate his entire long position causing the market to fall further. Thus C, to minimize his losses, immediately begins to sell the available market bids. Pit trader D, a small local �scalper’ believes that A will not sell out his position, but rather that he will buy more. Therefore, D tries to buy one or two contracts for his own account, so that he can �scalp them a few seconds later at the higher price he expects will soon develop. Pit trader E, a �spreader’ between two or more different contract months, has just taken a short position in the contract month where A is about to enter the pit. E had intended to stay in an �unhooked’ position for thirty seconds or so before completing his spread by buying the other contract month. Upon seeing A, however, he decides quickly to �hook up’ his spreads in the other contract month so that he does not unnecessarily expose himself, since he is unsure of what A will do.

Actually it may turn out that A entered the pit, looked around, and left without trading; or he may have done what some of the traders expected. However it really does not matter what A did. All the bids, offers, and transactions in reaction to A’s entering the pit accounted for additional market liquidity. In fact, they created new market positions which, in turn, would have to be offset, probably that day, thereby creating further market liquidity.

The reasons for the trades are unimportant to this discussion. It is important that there was a visual and psychological interaction which cannot be duplicated by computer. Without the pit psychology, this form of liquidity is lost.

Interface Design Issues

The primary concern in creating a screen-based system is the impact on market liquidity [9]. Many factors on the trading floor contribute to an efficient market, and these may not be able to be fully replicated on a computer [10], but full replication should not be the immediate goal. Rather, a system developer should be concerned with the implementation of an interface which incorporates some of the defining characteristics of a floor-based market. These include visualization of the market and its participants, a trading process which allows active participation, and the human interaction between each of the participants. The last characteristic clearly is not easy to create. How does one duplicate the traders’ pitch and tone of voice and level of urgency in order execution? The answer partially depends upon the state of technology.

Currently, virtual reality (VR) systems are available for viewing financial data. For example, VR applications exist for showing multidimensional financial data to aid foreign exchange currency option traders using head- mounted display helmets, data gloves, and stereoscopic images[15]. Another example is a VR room with bobbing icons, each with different visual attributes corresponding to different financial data, through which a broker can accurately view a client’s portofolio holdings[8]. This technology in its refined state could greatly facilitate the trade process, but current technological limitations make these early systems impractical for trading use. Other technologies with application in the area include an eye tracking device for object selection, voice recognition, multimedia, video conferencing, and touch screen.

Design distinctions must be made between the symbolization of information, defined as data relevant in decision-making, and tasks (i.e. bidding, offering, canceling, etc.). Information can be further classified as either quantitative in nature (i.e. prices, quantities, spot data, etc.) or qualitative or psychological in nature. The latter characterization is illustrated by the pit psychology example. It is difficult to transpose this information asymmetry, present in psychological information, onto a screen-based system, but a number of ways exist to incorporate the available quantitative figures onto such a system.

The Pit

In creating an automated trading environment, it is necessary to establish a central object which will represent the place where virtual traders will reside and bid and offer contracts. A pit structure, such as those on the CME or COMEX, may be chosen as an appropriate central object. As the pit is static in nature, it may be constructed using a graphics program or bitmap image. It is worthwhile to consider that on the different floor exchanges, the actual physical characteristics of the pit differ. This suggests that they serve little purpose other than to provide a central area where efficient and open exchange is possible. However, in creating this image, it is necessary to indicate leveling. An example of the aforementioned psychological information, the grading of the pit exhibits a hierarchy among traders residing there. Figure 3 illustrates the idea.

Generally the above relationships hold, but, since traders are continuously gleaning profits and losses from the market, movement between rings is common [1]. In addition, there is not and should not be a definitive line on the pits demarcating the different classes of traders.

Traders

Traders view each other as information segments. Not only do they help relay public and private information to the marketplace, they signal their intentions by their bid/offer price and quantity. Furthermore, there are psychological ramifications to their every action. Thus, by having a list of the best bids and offers, as GLOBEX does, one does not see the entire market and the intentions of its participants. By modifying GLOBEX to show the entire limit order book, this would be solved, but at the significant cost of feasibility since these limit books are generally very large. Another way is to use an icon representation of each trader. Since some markets are very large with respect to the number of participants, there is an issue of available screen real estate. A solution to this would be to dynamically display those traders who actually have standing bids and offers. Unfortunately, this avoids the psychological component of viewing the entire market, but it is feasible given the current state of screen technology.

Using icons gives users symbols of actual human traders. With the advent of video conferencing it may soon be possible to show a bit mapped or even real-time image of each participating trader. While this may be farfetched, the idea should be transparent: to give the trader the human element which exists on the floor. Using traders’ initials as the icon is more practicable, and coupled with price and quantity data, the icon would combine quantitative as well as qualitative aspects into one package. It is also easy to view the icons superimposed onto a bit mapped image of a trading pit. To account for the hierarchical issues discussed above, icons can move to different regions on the pit depending on some moving average of that specific trader’s total dollar volume of the current day (initial positions can be determined from the previous day’s volume figures). Figure 3.1 shows an example of a trader-populated electronic pit. Each icon represents a trader. Those willing to buy are represented by a white icon and those willing to sell are depicted by a black icon. The icon for a small trader or scalper V, would indicate an offer for 5 contracts at 1.53, while an experienced, high-volume trader may be trader AE who is located towards the center of the trading ring bidding 1.37 for 200 contracts.

Trading Process

London International Financial Futures Exchange’s (LIFFE) Automated Pit Trading (APT) system [13] uses a 10 second limit on all orders after which they must be refreshed. This added feature forces traders to get more involved in the trading process. On the floor, traders must shout and gesticulate continuously in order to place a trade. Thus, on a theoretical system as proposed above, such a feature could be incorporated to keep the traders’ orders executable as long as their breaths are still warm[13].

Other Design Issues

Other market information such as spot and forward data, should be included as well. These quantitative facts may be displayed in separate windows. Thus, this element of the configuration would be very similar to GLOBEX. Since they are solely quantitative in nature, there is no need to be overly intricate in designing its interface. One technique would be to make use of scrolling which GLOBEX currently uses or create a substitution routine to simply replace the current data.

This system must also allow orders to be changed easily. Currently, GLOBEX can cancel an order and reenter it with a time priority loss. A new such system would have to allow order modifications as dynamically as possible, without any such loss of time priority.

CONCLUDING REMARKS

While London’s Big Bang clearly seemed to be advantageous, an analogous information technology upheaval at a floor based futures exchange would most likely have adverse affects on liquidity and volume. Part of the difference is a function of different fundamentals underlying trading in both markets. Trading stock is different from trading futures contracts. One difference which is interesting to note is that in trading stock there is more emphasis on fundamental analysis (i.e. balance sheet strength, price/earnings ratio, and return on equity) rather on overall price trends, and this is understandable since a share of stock represents direct ownership of a company. By contrast, trading futures contracts is based largely on expectations. Thus, a trader of futures is much more concerned with the overall trend in expectations than in the fundamentals for that particular contract. On the floor expectations are largely visible and price trends can be easily perceived.

Current interest in automating the $500 billion a day futures exchanges throughout the world insures continued research into methods of replicating floor trading on a screen. However, until additional communications bandwidth can be added to the interface of electronic trading systems, the acceptance of such methods will likely be limited. We are currently developing such a prototype that incorporates the design elements discussed in the paper.

Acknowledgments

This material is based upon work supported by the Information, Robotics, and Intelligent Systems Division of the National Science Foundation under Grant No. IRI- 9209576. We are grateful to John Santos and Robert Push, Brown Brothers Harriman & Co. Brain Sayler, Commodity Clearing Corporation and Elizabeth Block, Chicago Mercantile Exchange, for their assistance with this project.

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