Futures Shock Are trading floors obsolete?

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With their flashing boards and shouting traders, the frenzied floor pits of the world's stock and commodities exchanges are a symbol of the human side of the financial marketplace. But they are fast becoming a quaint anachronism. The British and French stock markets are completely computerized, the Toronto exchange plans to shut down its trading floor by the end of the year, and the Japanese, Koreans and Germans are rapidly moving in that direction. Now comes one of the biggest steps toward a global computerized marketplace: this week Reuters and the two major Chicago commodities exchanges plan to launch a system called Globex, a 24-hour electronic trading system for futures and options contracts. Eventually it and similar systems could handle stocks, bonds and any other trades, virtually eliminating the need for trading floors in New York City and other financial capitals.

Four years and $70 million in the making, the Globex system is a bid by the Chicago Mercantile Exchange and the Chicago Board of Trade to keep from losing yet another homegrown industry: futures trading. U.S. exchanges developed modern-day futures, including popular contracts based on Treasury bonds and the Eurodollar. By the late 1980s, however, copycat exchanges from Auckland to Zurich were able to establish their own futures markets by trading when Chicago was closed for the day. Last year the U.S. share of the worldwide futures business had slipped to about 50%, compared with more than 90% in 1985.

The Chicago exchanges are betting that foreign traders will flock back to the U.S. through Globex. So far, the London and Paris exchanges have signed up to use the system; the Tokyo, Frankfurt, Hong Kong and Zurich exchanges are expected to follow suit. Says Globex chairman Leo Melamed: "This is a way to extend our market around the globe across all borders and time zones."

When a customer now buys or sells futures, he calls his broker, who phones the order to the trading desk, which turns it over to floor traders in the pits. They, in turn, haggle over the best price for the order, which is then tallied and recorded. The whole process takes upwards of 20 minutes. With Globex, the floor traders and pits are completely bypassed. Prices are set by a computer match with incoming orders. Execution time: three seconds.

Since the system could one day be easily modified to trade stocks, Globex could further obliterate the distinctions between futures and stock exchanges and result in a new world order of financial markets. Says John Sandler, chairman of the Chicago Merc: "We can become a securities exchange. There's nothing to stop us from doing that."

That kind of talk worries officials at the New York Stock Exchange; trading technology is advancing so rapidly that the Big Board could be bypassed by such new high-tech systems as the Arizona Stock Exchange, the NASDAQ and now Globex. The N.Y.S.E. petitioned the Securities and Exchange Commission to slow down, if not unplug, some of the networks. Says William Donaldson, chairman of the N.Y.S.E.: "To our competitors, we're the big monster; and it's fun to zap the monster."