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The Electronic Trading System ? the Sleepless Futures Markets

By Zhuoyao Hui

  In 1997, Joseph B. Dial, then Commissioner of the CFTC, in a meeting with futures industry leaders, envisioned that screen-based systems would threaten open outcry, over-the-counter order matching systems.[1] A decade later, on October 26, 2004, the Commissioner of the CFTC addressed an intellectual property panel that one of the most significant trends affecting the futures industry is technology. Indeed, the turn of the century witnessed a new era of electronic commerce in the commodities and futures trading world. One important factor contributing to the change is attributable to State Street Bank and Trust Co. v. Signature Financial Group, Inc. that cleared away the last hindrance for corporations to invest in innovative process technologies by validating business process patents. [2] Since State Street Bank & Trust, the volume of trading on electronic exchanges has grown ten times larger than the open outcry trading.[3]

     If State Street Bank and Trust cleared the way for the development of electronic trading, then globalization of the futures markets is the primal driving force. In 1984, the CME and the Singapore Monetary Exchange [SIMEX] instituted their mutual offset system, the first international linkage between exchanges. In practice, the traders with the SIMEX can pay a little fee to join Globex that will open after the business day in Singapore is closed. This is the unified theory of Globex. The real trend toward electronic trading began with CME Globex, an around the clock, around the globe trading system, that started trading in 1992. Originally, the CME launched Globex in an effort to maintain its global dominances in Eurodollar contracts, as the Chairman of the exchange noted that it lost its Asian market to its competitors from Europe due to the time zone issue.[4]

     In the American Society of International Law Proceedings, CME Special Session on April 5, 1989, Mr. Leo Melamed, the principal architect of Globex, explained the reason for launching the e-trading system, "Today every financial center that is meaningful must have its own financial futures market. That means that when we, in the United States, go to sleep at night, our markets are no longer secure. For as soon as dawn breaks in Japan, financial markets are trading; and as soon as it is dawn in London the same thing occurs there. That means that the business that used to wait for our markets to open the following morning, no longer need to wait. Today, that business can be handled in its geographical center . . . [T]hose centers have a way of becoming very large and very efficient with the ability to attract some of our existing business. In order to protect our markets and to capture the effect of globalization, the CME decided to create an after-hours electronic transaction system." [5]

     The Globex has several advantages compared to the traditional open outcry trading system. First, it provides open access. Anyone having an account with a futures FCM or IB with a CME clearing house guarantee can electronically trade their products on their own account. [6] Secondly, with the CME acting as a clearing agent, electronic trades have the clearing guarantee. Thirdly, the Globex eliminated some of the difficulty with order entry on a trading flooring because "prices, order limits, and back office functions are implemented automatically and immediately over the electronic system."€�[8]

     Globex posed a challenge to the CFTC with respect to regulating foreign futures made available to U.S. clients over an electronic exchange. Initially, the CFTC’s solution was to allow Globex customers to place orders through a non-U.S. affiliate of an exchange member firm during hours when the CME was closed. [9] In February 1996, the regulation was loosened up with its Division of Trading and Markets issuing a no-action letter to the Deutsche Terminborse, an all-electronic futures and option exchange, headquartered in Frankfurt, Germany, and agreeing not to recommend enforcement action to the CFTC if the Eurex placed computer terminals in the U.S. offices of its members.[10] On June 2, 1999, the CFTC instructed the Commission staff to "€œbegin immediately processing no-action requests from foreign boards of trade seeking to place trading terminals in the United States."[11] In general, the CFTC commissioners advocated cooperation across market and national borders to deal more efficiently and effectively with expanding global markets and advances in technology.  [12]

     The world is changing ? it is becoming increasingly international. As an extension to the traditional open outcry trading, the Globex, both protecting and expanding the CME?s exiting product base, is the answer to the demands of a global economy. The Globex opens up the future of the futures markets.

Full post as published by The Journal of the Business Law Society on March 20, 2008 (boomark / email).