TECHNOLOGICAL TIDAL WAVE
at the Seventh Annual London International Finance Symposium
Conducted Jointly by the Chicago Board of Trade and the Chicago
November 7, 1991.
markets, as their name implies, should provide a glimpse
into the future. In truth, they often don’t. The
future is habitually too clouded and burdened with too
many imponderables to be seen clearly.
instance, here we are at the end of the twentieth century
in the midst of a global rebirth, one that should offer
an unequivocal picture of a bright tomorrow. Communism
slain, the tyrannical order of the Soviet Union dismantled,
East European nations freed, market economic order embraced
by all, apartheid in retreat, emerging nations in the Pacific
Rim, the European Economic Union about to commence. Good
yet, something gnaws at making an unguarded optimistic
prediction for the world. Perhaps it is because we know
of the contradictory and uncertain nature of mankind. Perhaps
it is because we know the steep price tag of all that lies
before us. Perhaps it is because we are concerned that
the global credit spree of the 1980s will demand payment
in the 1990s.
instead, allow us to stay clear of the unknown. Allow us
to talk about the inevitable. Allow us to predict that
whatever ensues, the role of futures and options will be
significant. Allow us to predict that whatever ensues,
our markets are about to be engulfed by a technological
Maxwell settled back and buckled the safety belt around
her as the British Airways 787 taxied out to the runway
at Kennedy. She pulls from her briefcase an IBM IAM-Port,
her interactive multimedia portable system, and turns it
on. After the screen in front of her comes to life, she
executes a few directions using the system’s electronic
mouse and is instantly connected to the Equity Information
Center at her Goldman Sachs office in New York. A few more
clicks on the mouse gives her the information she requested
as well as an online data feed to various markets around
the world. Robin studies the information, then calls up
a trader friend in Chicago, who appears on her online video
screen for a brief discussion of her market theory.
the airplane levels off at 35,000 feet, Robin checks the
time in London, calls up for a Globex connection on the
screen, and initiates orders to buy December S&P 500
contracts on the CME, sell March FTSE contracts at the
LIFFE and CAC-40 contracts on MATIF, a complex DAX/Nikkei
options spread on the Deutsche Terminbörse and Osaka
exchanges, and to buy February U.S. Bond puts at the CBOT.
she is finished with the transaction, Robin watches the
market for a while, sends a fax to her London office, takes
a sip of the coffee the stewardess provided, and asks her
IAM-Port to review the current crop of plays showing in
London so that she can make reservations for that evening.
fiction? Don’t bet against it. Interactive multimedia—a
multidimensional vehicle of communication representing
the coalescence of key communications technologies: television,
telephone, personal computers and laser storage systems—is
coming. When these technologies merge, life as we know
it will never be the same.
Robin Maxwell’s interactive multimedia system is
not yet available, what is available
is quite amazing. Robin can easily install a calling card
that provides her with 24-hour real-time market information
in stocks, futures, options, and mutual funds.
she can install a real-time spreadsheet system which will
display, analyze, and monitor continuously current financial
data with electronic online data feeds.
she can install a portfolio information management system
designed to document and control transactions and positions
in actively managed portfolios or funds.
she can install a software product providing a host of
analytical calculations, regression analysis, and exponential
smoothing from single or multiple databases.
she can install a software providing daily investment performance
calculations by account, currency, group, sector, and industry.
could go on and on, but you get the point. These are not
esoterica of a future tomorrow. I am describing a bit of
present day avant garde technology. A few years ago, these
systems were but on programmers’
drawing boards. A dozen years ago, they were someone’s
overactive imagination. And 20 years ago? Well, let me tell you.
1972, the markets of futures and options were among the
very first to discern the meaning as well as potential
of the coming new financial age, an age that above all
was to be directed by a new technological standard. The
new technology, while still then in its infancy, was to
instigate an information revolution that would dramatically
change the scope, nature, and structure of financial markets
Walter Wriston then predicted, by virtue of the information
revolution we would be witnessing a galloping new system
of international finance, one that differed radically from
its precursors in that it “was not built by politicians,
economists, central bankers or finance ministers...it was
built by technology...by men and women who interconnected
the planet with telecommunications and computers.”
results were spectacular. As a consequence today we live
in one interrelated, interdependent world economy. Distinct
divisions based on time zones have vanished. Geographical
borders that once could limit the flow of capital are history.
Internal national mechanisms that once could insulate one’s
population from external price influences are impotent.
Financial markets are now virtually unencumbered, continuous,
and worldwide in scope.
the markets of futures and options understood the consequences
of the new technology, embraced and adapted to its demands,
our markets blazed the trail for much of what has since
followed in world capital markets. We established that
there was a need for a new genre of risk management tools
responsive to institutional money management and modern
telecommunications; we introduced the idea of risk management
as a regime; we fostered the concept of financial engineering
as a commercial necessity; we became the catalyst for the
invention of a multitude of new products, both on and off
exchanges; we caused the acceptance and integration of
futures and options into the infrastructure of the financial
establishment; and, we engendered the development of futures
that was the first phase. And while exciting and highly
successful, it was only the beginning. The evolution of
our markets is a continuous living thing and cannot stop.
Nor, I daresay, will the breathtaking speed of technological
innovation. I speak not of the good or bad of it, I speak
only of its inevitability. Indeed, as the guy said, “You
ain’t seen nothing yet.” What is coming down
the technological trail in the very near future will again
completely transform our marketplace and make trading unrecognizable
from what it is today. What is coming is a computerized
trading competence undreamed of but a mere decade ago.
of it is structural. Computer-aided systems engineering,
the so-called CASE, represents a new wave in programming.
CASE moves systems development away from its traditional
art form and more into the realm of science. It applies
engineering discipline and computer support to systems
building. It allows software development to focus on solving
business problems. Its applicability is boundless. The
Paris Bourse, for example, used CASE to overhaul and streamline
its clearing system in order establish a competitive edge
in Europe. Similarly, Paine Webber, by enlisting CASE,
will become one of the first wire houses to attempt to
retool itself for the 1990s with a state-of-the-art distributed
computer system that will provide round-the-clock online
availability for trading, marketing, and customer data.
of it is being developed by the exchanges. For instance,
on the Chicago Mercantile Exchange and the Chicago Board
of Trade, systems are being jointly developed to accept
trading instructions from market participants worldwide
and deliver them electronically directly into the trading
pits. Orders will be routed through the CME’s TOPS
or the CBOT’s EOS system for electronic switching
to the proper pit broker who will utilize a computerized
broker’s workstation to organize and instantly report
trade status back to the customer. Independent traders
in the pits will utilize the latest innovations in handheld
technology with which to do their proprietary trading and
to instantly report their trades for clearing. These so-called
AUDIT terminals will use advances in pen-based handheld
computers including handprint recognition.
most of it is in software. Intelligent agents will “reside”
in computers to create a world we can hardly envision. As Craig
Torres of the Wall
Street Journal recently
reported, during the past five years, major American market participants
have spent millions of dollars to advance their computing potency.
Indeed, one estimate says U.S. securities firms will spend some
$7.5 billion on technology in 1991. Firms the likes of Morgan
Stanley, First Boston, O’Conner & Associates, Salomon
Brothers, Kidder Peabody, and Goldman Sachs and others are using
automated development tools to build brand-new software programs.
They are venturing to achieve a new generation of
“analytics”—sophisticated mathematical computer models that
can act as giant think tanks in order to identify hundreds of never-before-imagined
trading strategies in securities, futures, and options.
the trend is still in its infancy, its direction is unmistakable.
Until now computers were used mostly as spreadsheets, or
as fast calculators, or to analyze risk, or to run accounting
or other programs. In the coming age, computers will no
longer act within the framework of their traditional competence,
they will have gained artificial intelligence. The next
generation of analytics, now in development at sophisticated
research laboratories, seeks to apply brand-new financial
theories and allow the trader to apply them to markets
on an ongoing basis. The evolving new mathematical formulas
will imitate how traders think and look at markets—but
several thousand times faster than humans can. In fact,
a new supercomputer has just been unveiled that runs at
a speed of one “teraflop,”
a trillion floating point operations per second.
a consequence, computers are on the verge of generating
a wave of pristine trading strategies that will offer heretofore
unheard-of opportunities. Computers are searching for price
correlations and connections between markets that human
traders never thought possible or never thought about at
all. Computers will invent virgin tactics within a complex
set of transactions inconceivable for the human mind to
have perceived. Computers will create synthetic options
and futures far beyond human imagination. Computers will
find ways to blend these new analytical transactions with
traditional strategies to produce even more complex possibilities.
And while the bulk of the new wave of technological transactions
will be utilized off exchanges—within the cash markets—the
markets of futures and options are bound to be substantial
beneficiaries as well.
example, computers recently created a synthetic option
on the Nikkei Index. It was produced out of a combination
of Nikkei stock index futures and exchange-traded stock
index options. The synthetic Nikkei option cost less than
the real thing and allowed traders who recently used it
to make $500,000 on a single trade.
another instance, a managing director of a major securities
firm recently created a two-year option that gives an investor
the right to buy the S&P 500 stock index at its lowest
point of 1991 in Swiss francs. Without analytics, such
products could not even be imagined.
mathematical sciences department, very much involved in
the development of analytic market math, is working on
a mathematical model that will allow investors to assemble
hundreds of portfolios in seconds and have various shadings
of investment risk and reward.
a constant 24-hour market, IBM has also been working on
a mathematical model for the past two years that will scan
the trading pattern of stocks or bonds around the world
and around the clock. Says the department’s director, “Time
shouldn’t be measured by how the clock ticks, but
by the level of trading activity.”
By creating a model that uses trading activity as a measure
of time, IBM hopes to create a new vantage point for spotting
one would expect, competition in this emerging field will
be fierce, every new analytic a most closely guarded secret.
Remember, the only proprietary component for the inventor
is the mathematical formula he devised which offers unique
profit opportunities in markets that are extremely efficient
and extremely competitive. Consequently, while many of
the major firms are working feverishly to develop analytic
competence, much of it is hush-hush and most of it behind
the secret is out anyway. New computer-generated mathematical
analytics are coming whether we like it or not. Says Myron
Scholes of the coming new age in trading, “People
who don’t have analytics are going to be relatively
obsolete.” What he didn’t
mention is that not only will analytics achieve a myriad
of new trading opportunities, they will also result in
a myriad of new regulatory concerns, issues, and problems.
How will these new transactions be regulated? Will they
be regulated? Can they be regulated? And, in any event,
what dangers do they pose for the financial structure of
the world? Those are legitimate and important issues yet
to be recognized by the federal regulatory bodies of the
world as well as, I might add, the traditional exchanges.
Sad to say, very few understand the full scope and nature
of the technological tidal wave coming, let alone comprehend
what its ramifications will be or how to cope with them.
it is important to note that as IBM suggested, the new
technological trading competence will be structured to
capitalize on the coming global 24-hour market. Yes, the
revolutionary Globex concept fostered by futures markets
has now become establishment even for the securities markets
and even before our own international system is functional.
Thus, you not only see the NYSE moving in the desired direction
with after-hours trading sessions, you see the launching
of NASDAQ International, a trading system for U.S. stocks
on an electronic screen; you see the Japanese over-the-counter
market launching a similar system; you see the Italian
securities market leaving the traditional open-outcry stock
trading for computerized screens; and, of course, you see
similar systems such as at LIFFE, MATIF, Sidney Futures
Exchange, TIFFE, SOFFEX, and DTB springing up all over
coming new technological age, when combined with more globalization,
instant informational flows, 24-hour trading, immediate
access to markets of choice, and intensified competition,
offers immense opportunities for the markets of futures
and options. In a world where financial risk is constant,
where financial volatility is commonplace, where innovation
is rewarded, where demand for unique risk management strategies
will increase, where financial engineering is prized, where
opportunities will rapidly appear and disappear on a constantly
changing financial horizon, and where professional management
will continue to demand efficient instruments of trade,
in such a world, the role of futures and options is fundamental.
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