If it ain't broke, don't fix it.
That seems to be the attitude of many investment managers, despite increasing attempts to bring electronic trading to U.S. futures and options markets.
So the announcement of a new electronic derivatives exchange didn't garner much enthusiasm from derivatives portfolio managers, who don't see a reason to change from the open-outcry system.
The new options exchange, the International Securities Exchange, will try to wed electronic trading with auction-market principles, using technology developed by Compaq Computer Corp., Houston, and OM Gruppen AB, Stockholm.
The ISE is primarily owned by E*Trade Group Inc., a Palo Alto, Calif., electronic brokerage firm, and is planned to open for trading in 2000.
Exchanges are working hard to keep their turf amid challenges like the ISE, which was unveiled Nov. 10.
The Chicago Mercantile Exchange announced Nov. 17 it will offer electronic trading of its popular Eurodollar futures contracts simultaneous to its open-outcry trading, beginning in June, and Eurodollar options in January 2000.
The Chicago Board of Trade began offering electronic U.S. Treasury bond futures contract trading Sept. 28 alongside its open-outcry trade in response to external competition from the fully electronic Cantor Exchange, New York. The Cantor Exchange is a joint venture of Cantor Fitzgerald LP and the Board of Trade of the City of New York.
And the London International Financial Futures & Options Exchange recently underscored its commitment to shifting all of its trade to electronics.
But with trading liquidity in the pits strong, and brokerage commissions relatively low, many investment managers couldn't find a good reason to switch to the uncertainty of electronic trade from the established success of open outcry.
"Open outcry is a beautiful thing. It really is," said Tim Rudderow, senior vice president with futures manager Mount Lucas Management Corp., Princeton, N.J.
"Yeah, it's an old system. It's an archaic system. But the damn thing works," said P. Todd Miller, associate director for money manager First Quadrant, Pasadena, Calif., speaking about open-outcry trading.
Support among managers for open outcry derives from the presence of local traders in the pits who provide deeper markets during times of market stress than electronic systems do, managers said.
"It's too easy for market makers to hide behind the machinery" if they want to, Mr. Miller said. Local pit traders, though, can't hide as easily, and the good ones trade even when markets are going crazy, he said.
Charles A. "Tony" Baker, principal and executive vice president with futures manager Trilogy Capital Management LLC, Princeton, N.J., said the issue boils down to choosing the method that better spreads risk into the market.
"Can I get my trades off when stuff hits the fan?" Mr. Baker asked. In his experience, open outcry has worked better than the electronic systems.
Managers pointed to the experience of France's derivatives exchange, MATIF, when it switched to electronic trading from open outcry.
"To me, it (MATIF's switch) was a complete disaster" in the beginning, Mr. Miller said.
While options liquidity in MATIF's CAC-40 equity index contract has improved recently, it still lags what it was under open outcry, he said.
Even the Deutsche Terminborse, largely considered a success, isn't as good as open-outcry systems, Mr. Miller said.
But futures brokers, called futures commission merchants, don't necessarily see it that way, because their costs have remained steady or risen, as futures commissions have fallen. Hence, they may be in more of a position to push for electronics, Mr. Rudderow of Mount Lucas said.
The savings to end-users of electronics wouldn't be significant, he added.
But portfolio managers at Monitor Capital Management, Princeton, N.J., say they are excited about using electronics for some of their derivatives activity, mainly smaller and odd-lot trades.
Monitor already uses the CME's all-electronic E-mini S&P 500 contract, said James A. Mehling, president and chief investment officer.
The advantages of electronics come in the form of streamlined processing and elimination of the human element.
"There is no room for errors," said Francis Ok, head trader for Monitor.
Monitor executives are working to begin online trading of futures contracts through ZAP Futures, Chicago, a division of LFG LLC, Mr. Ok said.
The ZAP trade orders will go directly to the center of the trading pit, bypassing the runners who get trades to the floor and introduce more potential for errors, he said.
Despite their enthusiasm for electronics, Monitor executives strongly believe that the open-outcry system should be maintained, but with the option of using electronics when the advantages of open outcry aren't needed.
"There will always be a need for open outcry," Mr. Mehling said.