Screen versus Pit: Score One for Project A
How supporters of the CBOT's off-hours electronic trading
system forced it to rethink its link with LIFFE.
By Margaret Elliott
The Chinese say be careful of what you wish for, because you just might
get it. That's exactly what's happening at the Chicago Board of Trade. It
wanted an international contract for its open outcry pits and a successful
off-hours electronic trading system. With the opening of the CBOT's long-awaited
link with the London International Financial Futures Exchange (LIFFE) due
on May 9, it looked like the CBOT could have both wishes.
It should be cause for celebration. But the CBOT got more fireworks than
it expected-and not all of the celebratory kind. The original LIFFE link,
negotiated in 1994, gave the CBOT a surefire shot at establishing an international
contract-LIFFE's German Bund contract-on its own floor. At the time the
CBOT didn't look like it was giving up much for the privilege-just three
hours or so of trading in the U.S. 30-year bond contract in the early morning
hours, Chicago time.
But that was before the CBOT's second wish came true. Project A, the
exchange's off-hours electronic trading platform, after a long gestation,
has finally turned into something of a hit, with a 359-percent increase
in contract volume in 1996 over 1995.
So what's the problem?
Project A operates a short afternoon session immediately after the pits
close. But it also operates an overnight session, from 10:30 p.m. to 6:45
a.m. Chicago time, which includes the key 4 a.m.7 a.m. Chicago time
slot when LIFFE is set to trade the flagship U.S. bond contract in the pits
in London. On May 9, Project A was due to shut down for trading the U.S.
30-year bond contract during two of those three hours.
For the growing band of Project A users, cutting off trading during those
hours would have destroyed a good portion of Project A's value. As it turns
out, this is a powerful group of members. In late January, the board of
directors of the CBOT voted to renegotiate the CBOT/LIFFE link agreement
to allow complete parallel trading in the pits and on the exchanges' electronic
platforms-CBOT's Project A and LIFFE's APT system. "There has always
been some overlap and there are people at LIFFE who think a complete overlap
will provide more liquidity," says Daniel Hudson, chairman of LIFFE.
"It is being discussed by a senior group of directors at LIFFE and
we expect the board to make a decision soon, before the link opens in May."
Once a new agreement between the two exchanges is reached, it must be voted
on by CBOT members. A vote of LIFFE members is not necessary.
It's a victory for the supporters of Project A. "The LIFFE link
in its present form would be a disaster for the CBOT," says Ray Cahnman,
chairman of Transmarket, a Chicago-based market-maker that has the largest
installation of Project A terminals. "We need to keep Project A up
throughout the night so we can find out which one will attract the volume.
I know which one will work better-Project A. But we wouldn't know unless
they go head-to-head."
He argues that it's critically important to keep the momentum of Project
A, which is growing faster than any other electronic exchange in the world.
"Having Project A and APT running at the same time as the open outcry
trading in London and Chicago is the only plausible solution," says
Peter Todebush of Jackson Associates. Angelo Russo, CBOT's senior marketing
manager for Project A, would be satisfied with this outcome, but is unable
to comment further until the membership has voted to accept the renegotiation.
Tug of War
It is tempting to see the push to get complete overlap between Project
A and the LIFFE link as a tussle between young and old. To an extent, it's
true. The users of Project A are young, often 20-something clerks who work
the floor during the day, but trade for their own accounts via the relatively
affordable Project A terminals at night. The management of the CBOT, by
contrast, is filled with seasoned pit professionals who fill the floor during
the day, and choose to sleep during key Project A hours.
But this would be a naive interpretation, because both the LIFFE link
and Project A have greater implications for the future of the CBOT. The
CBOT, in fact, is made of several constituencies. For the purpose of the
Project A-LIFFE link conflict, the two key groups are the local firms, which
trade only in Chicago-and the international firms that already have trading
operations in place in London, New York, Tokyo and other cities. For the
international firms, it makes little difference whether they trade the bond
contract in Chicago or London. For the local firms that have embraced Project
A most completely, trading or executing the bond contract for clients in
London would be prohibitively expensive.
The CBOT, for all that it seems to be bowing to pressure from Project
A users, is not throwing over open outcry. "You must remember that
the CBOT is committed to open outcry markets," says Russo. "We're
not in the business of building an electronic market to supersede our pit.
We wouldn't be investing $182 million in a new trading floor."
Project A supporters, however, argue that volumes are too thin in the
overnight markets to support an open outcry pit on the U.S. contracts alone-either
in Chicago or London. "Project A is the way to go with the overnight
markets, because you don't need to be alert absolutely every second,"
Some Chicago locals are also suspicious of the CBOT's unwillingness to
market and upgrade Project A. "If the CBOT had promoted Project A properly,
the LIFFE link wouldn't have a chance," says one Chicago market-maker.
"It would be irrelevant." They believe that if Project A were
available worldwide via dial-up connection (see box), it would have many
more users and massive volume.
Project A fans aren't willing to have their system turned off without
a fight. To this end, Cahnman for one is preparing to lobby the membership
to vote for overlap when the issue comes up later this year. The problem
will have to be resolved one way or another before the LIFFE link begins
trading in May. The CBOT's Russo maintains that the conflict is a mirage.
"The CBOT is committed to its member firms and their customers, and
expects both to expand Project A and provide a variety of new products on
the floor for additional trading opportunities," says Russo.
The best computer game in the world
For Ray Cahnman, Project A "beats Super Mario and any Nintendo game
ever made." And unlike the kiddy games, it's making its players real
money. Cahnman, in fact, once constructed bunk beds in a corner of his trading
office to allow ambitious young traders who clerk during the day to catch
a few hours of sleep in the evening before starting their night-time shifts
on Project A.
Traders like Project A because its rules allow for big trades, growing
liquidity and enough challenges to spark plenty of competitive games.
Cahnman attributes the success of the system to its unique trading allocation
algorithms, which more closely reflect an open outcry environment. Unlike
other electronic trading systems-like Sydney's SYCOM and the CME's GLOBEX-Project
A does not use a strict first-in, first-out allocation system. Instead,
trades are filled proportionally.
But Project A grants a special privilege to the first bid or offer that
narrows the spread. This trader is rewarded by having all of his or her
contracts filled or sold when the first opposite bid or offer appears. Traders
know they're first in line because a letter "T" appears on their
screen, but no one else knows they have this special priority. Thus traders,
particularly locals, are encouraged to log on early, bid and offer aggressively,
and stay on the system.
Access to Project A, however, remains a problem. Traders must use a proprietary
and expensive Project A terminal. There are only 160 terminals in operation
worldwide, mainly in Chicago and New York, though work-station access is
being tested in London. With traders clamoring for screens, particularly
at home, the obvious upgrade to Project A is to provide dial-up PC access,
so traders can bypass the CBOT's Project A hardware. That is due by the
end of the year, though, says Patricia Jurka, senior systems instructor
at the CBOT, a date hasn't been set.
The software is also being improved. New enhancements allow all participants
more flexibility to look at order history by different variables. The CBOT
has also added programmable quote pages, screens for filled orders and better
The CBOT is updating Project A from a system written for a local area
network to one written in Java that can be used with little alteration on
multiple platforms. This change will come up concurrent with the dial-up
connection but will be invisible to the traders.
As far as Project A fans are concerned, dial-up access can't happen soon