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Mahamad Rodzi Abdul Ghani




Mahamad Rodzi Abdul Ghani





CHICAGO, March 19 (Reuters) - Not long ago industry experts predictedthat the waving, shouting, colorfully-dressed traders in the Chicagoexchange pits would soon go the way of the dinosaur, replaced by thesilence of electronic trade.But a funny thing happened on the way to extinction -- trading volumein the pits actually went up last year.On the surface, it seems that happy days are here again in Chicago.Volume on the Chicago Mercantile Exchange, the largest U.S. futuresmarket, surged 78 percent last year.At the venerable Chicago Board of Trade, the world's oldest futuresexchange, volume jumped 11.5 percent in 2001 due to more active financialfutures and options contracts.Both exchanges showed profit last year as higher volume boosted incomefrom trading fees. The exchanges managed their robust performances eventhough electronic trading accounted for just a fifth of the volume of bothexchanges in 2001.But look beyond the increased volume and the situation in Chicago ismore troubling. Electronic trading is growing rapidly internationally, andthose who use the computerized markets like the low cost and efficiencythey bring.Change advocates continue to call for a faster pace of automation,although the strong performance of the last year has emboldened thetraditional traders who call orders in the trading pits.The conflict is leading to a battle for control at the ChicagoMercantile Exchange leadership because of worries over the pace of change."They (Chicago) don't want to change. The market was so good last year,they are thinking 'it's working again, so why should we do something newor dangerous for us?'" said Patrice Blanc, Chairman of trading firm FimatUSA, Inc.

ELECTRONIC BOOMWhile Chicago clings to traditional ways, the rest of the world hadmoved rapidly to electronic trade. Two powerhouse derivatives exchangeshave emerged in Europe -- the world's largest futures exchange, Eurex, andEuronext/LIFFE, a merger of stock and derivatives marts -- bothexclusively electronic.Once preeminent, Chicago's share of world derivatives trade shrank tojust 21 percent last year.And new exchanges are springing up to take on Chicago as a derivativeshub. The most successful, the International Securities Exchange, last yearcut into the stock options business of the Chicago Board Options Exchange.Another electronic exchange, BrokerTec, has set out to peal away Chicagovolume in goverment bonds with limited success so far.At least three other groups, including a consortium of LIFFE and stockexchange Nasdaq, electronic stock trading system Island Futures Exchange,and the American Stock Exchange, are lining up to take on Chicago laterthis year in single stock futures, the newest niche in U.S. futures trade.

FRIGHTENED INTO CHANGEA few years ago the Chicago exchanges were so frightened by electronictrading they took halting steps to reform. They reached outside their ownranks to hire new chief executives to run the exchanges more like publiccompanies. The CME in 2000 hired James McNulty from the investment bankingfirm Warburg Dillon Read, and last year the CBOT hired David Vitale fromBank One Corp .They took steps to "demutualize" or transform themselves frommember-owned to publicly-listed corporations. The CME could launch aninitial public offering at any time, while the CBOT is not yet as faralong in the process.They have invested in electronic trading systems -- GLOBEX at the CME,and a/c/e, a venture with Eurex, for CBOT.For a while the strategy seemed to offer the best of both worlds --prepare for an electronic world and keep open outcry trading going as longas possible. But in a strange irony, the trading boom last year has fueleda backlash."Now people say things are going pretty well, maybe we can slow down,"CME Chairman Scott Gordon told Reuters. "We can't stop (innovating)because we had a good year."Industry sources told Reuters that the CME old guard, led by formerchairmen Leo Melamed and Jack Sandner, are organizing an effort to oustGordon and replace him with Vice Chairman Terrence Duffy, who they believeis more in tune with the wishes of the traders in the pits.The battle could play out around April 17, when Gordon is standing forreelection to the CME board.

LAST STAND IN THE PITSReform-minded traders in Chicago and industry officials outside saidanother bout of infighting would be a setback for Chicago's efforts totransform itself."It is impossible for me to imagine five years from now any open outcrytrading almost anywhere in the world," Ron Hersch, Senior ManagingDirector of Bear, Stearns & Co. Inc, told the annual futures industryconference in Florida last week.Some companies are starting to complain that Chicago's straddling thefence between the pits and computers is costing them money because theymust keep parallel pit trading and electronic trading operations."Having to support these two venues is really killing us," Hersch said.The dual systems mean that it is more expensive to trade on U.S.markets than in Europe, FIMAT's Blanc said.To be sure, there are practical problems to sort out before Chicagotrading could move exclusively to electronic systems. For example, traderssaid that the sophisticated spread strategies used in Eurodollars areeasier executed in the pits than on electronic screens.But others said the pace of technology is so fast that before long eventhe Eurodollar trading complexities could be sorted out on electronicsystems. The CME is investing in software to do just that.A few of the basic commodity markets such as metals in London andgrains and livestock in Chicago may continue to trade in the pits for along time, industry sources said."What we would like to see is the big financial contracts go allelectronic," FIMAT's Blanc said.