Electronic Order Routing: Quick, Efficient and Controversial
Cavalett, Carla, Modern Trader
While electronic order routing is the answer to the customer's demand to have an order executed as quickly and accurately as possible, it has sparked a number of questions for FCMs and exchanges.
With the advances the futures industry has made in electronic order routing over the last few years, taking a job as a runner may not be the best career move, especially because some exchanges and futures commission merchants (FCM) are including electronic order routing in their daily routines. But before we see an automated trading boom or before runners should lose sleep, the exchanges and FCMs will have to overcome a few hurdles.
Developing a common message switch for the industry, determining who should provide the technology (the exchanges or the FCMs), and reworking exchange policy as technology advances are problems the groups face before a paperless, seamless trading environment is reached.
While the technology already exists, each exchange, FCM and proprietary trading firm is at a different rung on the ladder of electronic order routing.
Interactive Brokers, the brokerage arm of Timber Hill, a New York-based marketing firm, is near the top. The firm's system can take an order from a customer workstation, send it to a hand-held device operated by a broker in the pit, execute it and send it back electronically to the original workstation for confirmation in less than 20 seconds. The fill information also is sent electronically to the clearing corporation and to the customer, which completes the loop.
David Downey, vice president of Timber Hill, says the system was built with speed in mind; however, its capabilities provide other benefits. The system has eight time stamps that record information electronically, meeting the Commodity Futures Trading Commission's (CFTC) audit trail requirements and more.
"We are teaching the exchanges a thing or two about the audit trail," Downey boasts.
Downey received permission from the CFTC to bypass the rule governing that all firms must have a time stamp machine. Disputing rules and regulations originally planned for a world of paper trading has been the norm for Timber Hill. Downey also had to explain to an exchange why every time stamp, from the moment the trade hit the exchange to the time it was confirmed, was recorded as the same minute. He spent a couple days convincing the compliance department that this was not a mistake and took place because each transaction only takes seconds. Currently, Downey is debating with the Chicago Board of Trade (CBOT) whether Timber Hill can use its hand-held devices directly in the Treasury bond pit.
But even with these roadblocks, Downey encourages other firms to adopt proprietary systems instead of exchange-developed technology.
"The audit trail should be a member firm burden not an exchange burden," Downey says. "We are spending too much of our members' money and wasting intelligence finding ways to circumvent the audit trail. It is in our best interest to comply with it by being incredibly efficient."
With such a small number of firms using electronic order routing - only about 10% of the members on the CBOT and the Chicago Mercantile Exchange (CME) - convincing firms to adopt a limited practice is a challenge. Downey proposes an economic incentive.
"Charge the FCMs $2 per contract for every order that does not reach the clearing organization in 10 minutes, and then see how long it will take them to comply," he says.
A solid start
Several firms, including Merrill Lynch and Lind-Waldock, have proprietary systems that send orders to the floor that are ran or flashed into the pit. And others, including Rand Financial Services and BZW Securities Inc., are developing similar systems. Rand is testing a system that routes orders from a central server to a desk on the floor. The system also will have the capability to connect into the Trade Order Processing Switch (Tops) Route, the CBOT's order routing system, which can send a trade directly to the Electronic Clerk (EC) in the pit for immediate execution (see "Less pulp," left). …