Exchanges plan to take pits high-tech

In a move that would change a century-old method of doingbusiness, Chicago's futures exchanges are planning to introducehand-held computers into the pits to replace paper trading cards.

The move is aimed at saving the traditional open-outcry tradingstyle that has drawn intense criticism since an FBI undercoverinvestigation of alleged fraud in the pits surfaced in January.

The new computer system is designed to provide the irrefutableaudit trail needed to "catch every single abuse that someone woulddare attempt," said Leo Melamed, chairman of the Chicago MercantileExchange executive committee. "(It) will automatically prevent most,if not all, of the indictable offenses we have seen." Added ChicagoBoard of Trade President Thomas Donovan, "There is no price that wewouldn't pay for better credibility."

The system is being developed in an unusual joint venturebetween the rival CBOT and Merc, targets of the federal probe. Theexchanges so far have pledged $5 million to develop the hand-heldterminals called AUDITs (Automated Data Input Terminal) that are thecenterpiece of the project. They plan to have a working prototypewithin a year. Said CBOT Chairman Karsten "Cash" Mahlmann, "We'renot waiting for any store to produce it."

The terminals automatically would record the time of each trade,and that feature alone would discourage abuse, exchange leaders say."There is no eraser," said Melamed. Once it's recorded, "There is noway you can change the time of execution."

With the new system, most traders would use hand-held AUDITterminals to immediately record every trade as it's made, enteringthe computer price, quantity and other essential details that now arescribbled with a pencil on trading cards.

Independent locals, who trade for their own accounts, would usesimpler hand-held terminals, while most brokers would use morecomplicated versions of the same device.

A few brokers in each pit who handle the biggest volume ofcustomer orders might use larger computer terminals mounted onpedestals directly in the pits. Other large computer workstationsmight be mounted on pedestals just outside the pits, manned by clerkswho would verbally relay orders to their brokers inside the pits.Brokers also might use their larger workstations to receive orders,then fill the orders using the hand-held devices.

The new computer system would substantially reduce the amount ofpaper used on the trading floors. In conjunction with the electronicorder-entry systems introduced last year, the system also wouldsubstantially reduce the need for "runners" who carry orders on thefloors.

"This is all working toward a paperless trading floor," saidMerc Chairman John Geldermann, who believes the new system will leadto new jobs that replace those lost to the new technology. "If we canbury the dinosaur (of the runner's job), I'm sure there will be otherjobs created."

Several traders interviewed Wednesday said they're worried thenew system will slow down the pace of trading so much that it coulddisrupt the markets. Several wondered if traders using the hand-heldterminals would be able to punch in a few shorthand details of atrade during a busy moment, then go back a few minutes later and fillin the rest of the necessary information, a common practice withpaper trading cards.

And the idea of broker workstations mounted within the alreadytight confines of the trading pits also drew questions. As one U.S.Treasury bond trader said, "It's going to be a major obstacle."

Exchange leaders said the AUDITs could be as quick as thecurrent trading card system, and just as compact. Melamed said, "Itisn't going to be a television set they're going to carry around."Added Geldermann, "Eventually the brokers will accept this and forgetthey ever had a card and a pencil."

And most trading sources said they believe the new system willbe accepted by traders, with some hailing it as a revolutionary step.

"Traders are not going to like it, but I think it's alifesaver," said Jack Barbanel of the Gruntal & Co. futures tradingfirm. Added Chicago commodities attorney James McGurk, "It's abreakthrough development. Clearly errors are going to continue tooccur and it will be possible to abuse the system, but it will beprofoundly more difficult."

One practice that would be more difficult with a computer thatautomatically time-stamps transactions is pre-arranged trading,McGurk and other industry sources said. One of the principal targetsof the federal investigation is pre-arranged trading, in whichtraders working with each other invent fictitious transactions topass money among themselves. "It's the working with someone we'retrying to stop," Melamed said. As for trades arranged ahead of timeoutside the pit, he said, "That cannot occur anymore" with the newsystem.

The automatic time-stamp feature also would virtually eliminateany abuses of curb trading, when transactions are made after theclosing bell officially ends trading. And it would improve detectionof trading patterns that indicate front-running, when brokers abuseinside information about big orders by trading ahead of theircustomers. Said Barbanel of the AUDIT system, "It will be literallytaking a picture of each trade as it happens."