GREENWICH, Conn. -- Open outcry has less than two years to live, as Thomas Peterffy sees it.
Speed will kill it, according to the chairman and chief executive officer of Interactive Brokers.com. The open-outcry trading systems used by the Chicago futures and options exchanges are doomed by the kind of electronic trading of options and futures worldwide handled by his firm.
IB.com, which has been a major player in the electronic trading of the new E-mini Standard & Poor's 500 index contract on the Chicago Mercantile Exchange, he said, is well positioned to take advantage of the expansion of electronic trading.
IB.com provides both institutional and retail clients with trading services on more than 30 exchanges around the world and Mr. Peterffy believes that competition from abroad -- where all the futures and options exchanges are electronic -- will provide the final push to electronic trading of futures and options in the United States.
The Eurex derivatives exchange, formed last year by the merger of Germany's Deutsche Borse derivatives exchange and Switzerland's Schweizer Borse, is all electronic. DTB has been all electronic trading since its founding in 1990.
In France, the Paris Bourse, which was formed June 1 by the merger of the derivatives exchanges Marche a Terme International de France and Marche des Options Negotiables de Paris, also has all-electronic trading.
Mr. Peterffy's interest in technology began when he came to this country from Hungary in 1968, spoke no English -- and got a job as a computer programmer where English was not necessary.
In 1977, after he learned the language, he bought a seat on the American Stock Exchange. He began developing computerized trading systems in the early 1980s, eventually equipping his traders with hand-held computers and expanding the number of exchanges on which his firm traded futures and options.
In 1982 he founded Timber Hill Inc., which initially just traded options on the Amex on a proprietary basis.
"The success of the operation depended on speed," he said. "We could detect buying and selling pressure before anybody else. The best way to do that was to develop a high-speed network connected to as many exchanges as possible."
In 1993 he founded Interactive Brokers, which made the firm's intercontinental trading network available to outside customers for the first time. In July 1998, Interactive Brokers.com began operation.
Speed is still of the essence to IB.com's operation. While officials at the Chicago Board Options Exchange bragged about an order being properly executed in one minute, Mr. Peterffy said his firm could "time-stamp an order six times in one second."
Orders must line up in an electronic queue to be processed. All orders are time-stamped when they arrive and depart. IB.com's orders take from 200 milliseconds up to about fourseconds to be processed. "The exchange isn't even in the same ballpark as us," he said.
'Best of both worlds'
Matt Moran, vice president of institutional marketing at the CBOE, said electronic trading "is not a black-and-white issue. We get the best of both worlds." The CBOE offers electronic trading through its Retail Automatic Execution System.
The Chicago Board of Trade has its own electronic system, Project A, which was launched in 1994. "Last year it was expanded to trade side by side with the pit in Treasury products," said Katherine Spring, CBOT spokeswoman.
She pointed out that while Project A gets a lot of volume overnight and in the early morning, 94% of the volume in the Treasury contracts is still open outcry.
In October the CBOT plans to begin using Project A to trade side by side with its Dow Jones industrial average futures products.
In New York, the Mercantile Exchange uses electronic trading for after-hours trading, from 4 p.m. to 8 a.m.
While some observers believe electronic trading could have problems in volatile markets with prices moving rapidly, Mr. Peterffy believes the opposite is true.
"With volatility, speed becomes even more important," he said. The orders are compressed in IB's network and "the faster the market moves, the more advantage you have if you are in the proximity" of the action. "Interactive trading basically puts you in the pit. You can hit bids before anyone else," he added.
Although various market makers and specialists are trying to carve out roles for themselves in the new electronic trading era, Mr. Peterffy said, "we provide the liquidity . . . operating as a middleman. Providing liquidity at a price is economically rewarding and it will continue."
James Oliff, second vice chairman of the CME, said in an interview, "Market participants will make the decision (if they want electronic trading). The key for our exchange is to offer both platforms." The CME offers electronic trading through its GLOBEX2 system and is expanding its capacity so it can handle higher volume.
Mr. Oliff believes that as successful as the E-mini S&P contract has been, part of its success comes from many electronic traders making bids and offers from prices in the open outcry market for the regular S&P 500 index futures contract.
IB.com has about 60 large broker-dealers as direct clients that buy its services and then provide them to their pension fund and money management clients, such as Refco Inc., a Chicago-based broker-dealer.
Said Richard Boerke, senior vice president of Refco: "Instead of needing individual access to the Eurex, Project A and GLOBEX, it (IB.com) offers them all and it's phenomenally fast."
While the exchanges haven't directly tried to put IB.com out of business, Mr. Peterffy said they have put up obstacles.
"We wanted to do something new and threatening," he said. "They've tried to find interpretations of rules on the books that would deny us access in the more automated way that we wanted."
For example, he said, when Timber Hill (of which IB.com is a subsidiary) wanted to equip its floor brokers with hand-held computers, it was told it couldn't be done "because you have to hold up both your hands when you're selling" futures contracts.
"It doesn't sound like something we would have said," stated Ellen Resnick, vice president, corporate communications, at the CME. "We started considering our own hand-held device in 1990, and we wouldn't have said someone couldn't use one on the trading floor."
CME traders now use sophisticated, hand-held computers developed by the exchange.
What has happened in the past, Mr. Peterffy said, is that when "whichever is the weakest computing exchange (with the least automation) agrees to something because they think it will give them more volume, then the others fall in."
As the U.S. options and futures exchanges use electronic trading more, Mr. Peterffy believes their transaction volume will grow.
"Ease of access will be much greater and the cost of transactions much lower," he said. "If it's available and inexpensive, trading volume should approach infinity."
On foreign exchanges, he said, "trading volume when (they've gone) electronic goes up 50% a year for the first few years."