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Pit Stops:
The Future of Trading Chicago Style |
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What is the future of trading Chicago style? I asked Larry Schulman. Larry is a former floor trader and assists traders in implementing strategies for the overseas markets. Larry is managing director of screen-based trading at Goldenberg, Hehmeyer & Co. |
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The two things that will make any exchange successful are market transparency (which includes access, price disclosure, and market information) and minimizing transaction costs (liquidity and direct costs). Electronic markets provide two things that market participants prefer. These are symmetry of information and equal access to market for all participants. However, both of these things are less important than transaction costs, in particular liquidity. Chicago traders are unsurpassed in providing liquidity anywhere in the world. The most stunning demonstration of this fact is the timing of the rapid switch of market share from LIFFE to DTB in the bund contract in late 1997. The shift of market share occurred simultaneously with DTB allowing remote memberships from Chicago. This brilliant marketing decision allowed DTB to get Chicago locals to compete with LIFFE locals in providing liquidity for the contract. On the surface what is a triumph for electronic trading over open outcry is in reality a ringing endorsement of the skills of Chicago traders. |
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What does this mean for floor trading and open outcry versus electronic trading? Electronic trading permits exceptional traders to trade in several pits simultaneously and participate on equal footing with a local trader who stands next to the biggest brokers. Electronic trading should eventually supplant open outcry: The superior traders will realize that they will make more money at the expense of mediocre traders because fewer traders will be required to provide the liquidity to attract market participants. In addition, electronic trading removes barriers to entry that make the most liquid pits natural monopolies. In established, liquid markets, new traders have a great deal of trouble trading with brokers and becoming visible to other market |
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