A CME PERSPECTIVE
published by Global Investment Management,
CME's official announcement of P-M-T, the after-hours electronic
trading system—whose permanent name was later to become GLOBEX—sent
shock waves through the futures industry. It represented a
violent break with tradition, something to be feared and abhorred.
those of us who had envisioned this revolutionary concept,
it represented quite the opposite. To us, use of technology
represented the recognition of reality. It embodied the use
of mechanisms that could protect our market share from foreign
competition as well as from competitive and hostile domestic
pressures all about us. To us, the march of technology was
a force one could not deny nor ignore.
how does one convince the rank and file of an industry—one
so committed to open outcry that the very thought of automation
sent shivers down its collective spine—to accept technology?
The task was not easy. The odds were long and the bets were
following represents the rationale for our action. It became
the CME GLOBEX manifesto. It was imperative that it be understood
and accepted by our members. It was imperative that
it be heard around the world. It was imperative that the mechanism
we proposed become the only international system for futures
and options. Today, this GLOBEX rationale represents the orthodox
view of the futures industry worldwide.
a bold and far-reaching joint undertaking, the Chicago Mercantile
Exchange (CME) and Reuters Holdings PLC (Reuters) entered into
a long-range agreement to create a global electronic automated
transaction system for the trading of futures and futures-options.
The system, called P-M-T (Post Market Trade—its working designation)
will operate worldwide before and after regular U.S. business
hours. P-M-T will allow transactions to be matched directly against
CME open positions and will be cleared by the CME clearing system.
The undertaking was overwhelmingly approved by referendum of
the CME membership on October 6, 1987. The concept embodied in
P-M-T is clearly an historic milestone in the development of
the futures trading. It embraces the realities brought about
by the technological revolution of recent years and represents
a giant step towards unification of the separate world's financial
centers. It puts the CME light-years ahead of its competition.
the fundamental principle of the CME/Reuters agreement involves
a significant departure from "established" futures industry
philosophy, it is imperative to began this discussion by addressing
its impact on the quintessential element of present-day American
futures: open outcry.
is fair to say that most observers and users of futures markets
hailed the CME announcement with admiration and approval. Yet,
it should be of little surprise to anyone that this view was
not unanimous. There are many within our industry who are vocal
critics of any movement toward automation, or (in some extreme
cases) even the adoption of technological advancements. These
elements argue that such reforms advance the black box and hasten
the end of open outcry. Obviously, the CME feels differently.
Although we too hold open outcry sacred, we do not agree that
such a philosophy requires a blind adherence to status quo.
and futures-options are dynamic and continuously evolving. As
our markets became the standard tools for risk management the
world over—as their applicability extended to new products, new
techniques, and new users—we grew from a 1976 volume of approximately
37 million contracts to a 1986 volume of 216 million contracts.
Today the futures industry is not in any way, shape, or form
the same industry that spawned the financial futures revolution
in 1972. Nor does this industry bear much resemblance to the
one that fought to prove its merit during the formative years
of its existence. We are today but a distant cousin to that which
gave us life and, while we must respect our heritage, we must
not be held back by its limitations.
our dramatic metamorphosis and expansion, the open outcry system
for execution of futures has been the only proven system for
achieving the degree of liquidity necessary to produce and maintain
a viable market. This is still the case and it would be futile
for anyone to argue otherwise. However, to blindly assume that
it will always be so, is to be lulled into a false sense of security
and forgo any opportunities to enhance or advance our way of
doing business. Such a policy is both foolish and dangerous.
outcry, for a multitude of reasons, is under attack. Whether
it is because of the system's inherent limitations, new and more
efficient technologies, new users and uses, competing securities
exchanges, foreign pressures, or competitive off-exchange applications,
the fact is that open outcry is being scrutinized and its efficiency
and necessity is increasingly being questioned. Those who close
their eyes to this truth do the open outcry system a severe disservice.
in order to preserve open outcry, it is imperative that we examine
the state of our industry in light of current demands on our
markets and in the context of those very competitive and technological
pressures that attack the present system's viability. We must
not only examine these issues, we must be willing to respond
to them in a manner that is consistent with the findings. At
a minimum, this means we must be ready to accept those aspects
of technology as well as those transaction modifications that
can be integrated with and applied to open outcry without materially
detracting from its inherent values. While this may not by itself
guarantee the continued life of open outcry, it will certainly
enhance its chances and serve to protect the future business
flows to our exchange floors.
outcry is predominantly an American phenomenon. With few exceptions,
other world centers have not long had this tradition nor had
much success with its application. Consequently, many foreign
centers have opted for either a partial or total automated execution
system. For example, the Japanese Government bond futures market—often
cited as the most successful foreign futures market—was not established
on an open outcry foundation and is destined to become fully
automated within a year or so.
the futures market pits remain the single most important source
of present-day liquidity, they are no longer the only source.
Today, there exists an army of upstairs traders whose trading
methodology is not dependent upon eye-to-eye pit contact, but
rather on two instruments: the computer-screen and the telephone.
Using these instruments, upstairs traders buy and sell in rapid
fashion throughout the day and provide a continuous flow of orders
to the market. They represent a liquidity-source nonexistent
just ten years ago. While upstairs traders cannot, in the near
future, replace the liquidity source of pit traders, there is
no denying that the former is a growing universe with no visible
limitation on its expansion. More important, upstairs traders
are especially well-suited for the automated execution process.
foreign centers this new source of liquidity is likely to develop
more quickly than would its open outcry counterpart. Consequently,
an automated execution system is much more likely to succeed
in non-U.S. time zones especially if the foreign system were
interlocked with its successful American open outcry counterpart.
recommendation to create P-M-T stemmed from a comprehensive,
year-long study undertaken by the CME's Strategic Planning Committee
which is charged with reviewing fundamental industry issues and
problems. Not surprisingly, the Committee determined that there
are three critical issues facing the futures industry: globalization,
automation, and off-exchange expansion. Its recommended solution
was a single response embodied in an automated after-hours transaction
marriage of the computer chip to the telephone changed the world
from a confederation of autonomous financial markets into one
continuous marketplace. No longer is there a distinct division
of the three major time zones—Europe, North America and the Far
East. No longer are there three separate markets operating independently
of external pressures by maintaining their own unique market
centers, product lines, trading hours, and clientele. Today,
users of every market come from around the globe because news
is distributed instantaneously across all time zones. When such
informational flows demand market action, financial managers
no longer wait for local markets to open before responding. Rather,
they have the capacity to initiate immediate market positions—a
capacity that has come to be known as globalization. With globalization,
each financial center has become a direct competitor to all others,
offering everyone new opportunities and challenges.
the past several years, exchanges have attempted to meet the
globalization challenge by searching for alternative solutions
to preserve local business flows and attract business generated
on foreign shores. With varying degrees of success, these actions
involved either electronic linkages with foreign exchanges or,
more recently, extended trading hours. While it is still too
early to fully evaluate the long-term effectiveness of these
alternatives, neither appear to represent an adequate response
to the opportunities and perils of the 24-hour trading day.
linkage, via a system of Mutual Offset (MOS), was pioneered in
1984 by the CME and the Singapore International Monetary Exchange
(SIMEX). It proved that markets in separate time zones can be
linked to allow safe access to each other's open interest, thereby
giving both markets the advantage of the other's non-regular
trading hour business flows. Although successful, the CME/SIMEX
experiment and other similar linkages that followed, identified
certain limitations to their overall effectiveness: that linkage
is not useful or successful for every type of financial instrument;
that regulatory and legal complications make it uncertain whether
electronic linkage can be achieved on a worldwide basis; that
competitive considerations between different market centers complicate
the implementation of a worldwide linkage system; and that no
single link-up can cover the entire 24-hour trading period.
concept of extended trading is not new. From time-to-time, all
exchanges have restructured and extended their regular trading
hours (RTH) to accommodate new business flows. Such past trading
extensions have more or less proved successful. However, extensions
of RTH beyond the parameters of normal business hours, as was
recently instituted by the SIMEX, the Chicago Board of Trade
and the Philadelphia Stock Exchange (with other exchanges planning
to follow suit), are far different in scope than RTH extensions
in the past. The problems of these new RTH extensions are considerably
more severe. There are the human issues: the ability to attract
a sufficient number of capable night-time market makers, the
strains on personnel, the disruption of traditional life-patterns.
There are the liquidity concerns: will domestic night-time business
flows be sufficient to maintain a liquid market until the anticipated
foreign business is developed? There are the monetary considerations:
the cost to member firms in maintaining night-time trading and
back-office facilities until the operations become profitable.
Nevertheless, on the surface the night session seems successful;
transaction volume has been good and, some say, better than expected.
Moreover, these sessions have and will benefit from sporadic
surges in volume whenever events occurring after RTH warrant
some fundamental concerns about these night sessions remain unanswered:
Extended night trading, as a response to globalization, addresses
only a small portion of the hours of the foreign business day;
It is highly unlikely that the session can be successfully extended
the full 16-hours necessary to cover the other two principle
financial time zones; The extended night session at best, can
only be applied to selective instruments of trade and will become
increasingly more difficult as additional products are attempted;
It is highly doubtful extended night sessions in the U.S. time
zone will dissuade a foreign financial community from instituting
its own exchange, in its own time zone, during its own RTH; Once
a foreign RTH exchange has been successfully established, it
will very likely become the dominant center for business from
its own locale. It will then act as a strong magnet for all business
flows during its own RTH, thus impeding the growth and purpose
of a night market on a distant shore.
while it is far too early to be definitive, unless unforeseen
events intervene, the extended trading solution of a night market
in the U.S. seems to have limited potential. While, undoubtedly,
it will be a window of opportunity for the next several years,
ultimately it can only hope to attain a secondary market niche
by way of arbitrage and minor business flows.
is the Chicago Mercantile Exchange response to the demands of
globalization. It will be an after hours automated transaction
system that will utilize the Reuter Dealer Trading System (RDTS).
The P-M-T concept combines elements of electronic linkage with
those of extended trading and integrates them with the open-outcry
system. In effect, it draws the best from the present and marries
it to the technology of the future. The ingredients of the new
trading system will include all the critical elements of a viable
trading environment: the liquidity and open interest of the CME
financial markets—representing the comprehensive spectrum of
instruments comprising the CME financial markets as well as selected
foreign financial instruments; a communications organization
with the largest international network of communications hardware
as well as the technological capability to create and conduct
an automated transaction system; and the capability, credit-worthiness
and established financial integrity of the CME clearing system.
international implications of P-M-T are self-evident and will
be felt throughout the world financial community. It translates
into opportunity and cost-efficiency whether you are a banker
in Tokyo, a risk manager in London, an investor in any part of
the world. P-M-T means that the financial markets of the Chicago
Mercantile Exchange, with their operational capabilities, liquidity
and safeguards, are open—not just during the regular trading
hours of the CME trading floor, but around the clock. Unlike
electronic linkage, P-M-T can be applied to every market equally.
Its worldwide implementation will be simple when compared to
the practical and legal complications of the electronic link-up
P-M-T has universal application and appeal. Since our announcement,
we have been approached by members from virtually every center
of finance for information about how to participate in the global
system we envision. It is well these questions are asked. For
it is fully the intention of the Chicago Mercantile Exchange
to extend its P-M-T concept to every center of trade and finance.
intend and will devise methodologies that will accommodate direct
access and participation for all communities the world over.
It is not our intention to keep P-M-T so closely to ourselves
that we exclude participants who can meaningfully contribute
to the success of the concept. To the contrary, we have advised
all that have come forward that the built-in flexibility of the
P-M-T structure will allow for the participation of their community
and individual members. We invite all other representatives from
world centers of finance to join in this revolutionary concept
and help us create a truly universal transaction system.
is a bold and comprehensive response to the opportunities resulting
from globalization as well as the dangers posed by automation
and off-exchange expansion. It represents a global transaction
capability whose time has come. When combined with CME's regular
trading hours, it can provide the world with its first literal
24-hour trading system.
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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