This Market's On The Move

Aided by technology innovation, including a systems upgrade, the Chicago Mercantile Exchange's biggest challenge is keeping up with growth

This view was to a large degree shared at the Merc itself. "We knew we weren't meeting everyone's expectations and obviously needed to get better," says James Krause, a 20-year veteran of the exchange who was named CIO last year.

It did. The exchange engineered changes in a number of areas, including strategy and marketing, but none more important than technology.

Keeping speed and reliability up to par requires the attention of the Merc's top IT leaders, CIO Krause says.

Keeping speed and reliability up to par requires the attention of the Merc's top IT leaders, CIO Krause says.

Photo by Chris Lake
Last year, the Merc overhauled its iLink gateway, which traders use to access Globex; it replaced a platform of Sun Microsystems servers running Sun's Solaris version of Unix with Intel servers running Itanium processors and Red Hat Linux. The effect on response time was striking: Average round-trip order-execution times fell from 650 to 100 milliseconds between February and May.

It was much-needed capacity: During the same period, the percentage of Eurodollar futures--which produces the largest trading volume for the exchange--traded on Globex more than doubled.

The change from a face-to-face to an electronic trading environment has not gone without resistance from traditional floor traders, who still have a powerful voice at the exchange. Many of them believe that floor trading imparts valuable information, such as the facial expressions and body language of people clustered around trading stations, that can't possibly be captured in an electronic system, says Jodi Burns, an analyst at research firm Celent Communications.

The Merc is taking steps to bridge the divide between the floor- and electronic-based trading environments. It has equipped floor traders with handheld devices and software that connect their own trading system with Globex; the devices now account for 350,000 contracts daily. Last year, it opened a Globex Learning Center, where traders take courses on electronic trading and conduct simulated trades on workstations supplied by vendors.

Yet even as the Merc was making the transition from floor-based trading to electronic, competitors were making plans to move in on its turf. Last year, the London International Financial Futures and Options Exchange began offering a competing Eurodollar futures contract to be traded on its Connect E-trading platform. The effort so far has succeeded in capturing a mere 2% of Eurodollar futures market share; the other 98% still belongs to the Merc. "LIFFE was probably surprised; it thought it could wrestle liquidity away from us," Krause says.

As it celebrates the fruits of its technology efforts, the Merc will be challenged to come up with novel ways to meet the growing demand for electronic trading. Under a deal with Reuters, for example, traders will be able to place orders for futures contracts at the Merc directly from their Reuters terminals. This is uncharted territory from a technology perspective: Although seven large financial institutions tested the setup, no one can predict what will happen once it goes live this year at 3,500 institutions around the world.

This isn't a problem for the Merc alone. Experts warn that expanding trading volumes and the increased complexity of instruments being traded will require greater expenditures of IT resources. Electronic trading is increasing trading volume, but it's also increasing the number of requests for information, and some worry the markets won't be able to keep up with the information avalanche. "All those additional orders are generating messages, whether they get filled or not," says Leslie Sutphen, president of Financial Markets Consulting, which advises futures and options exchanges on systems enhancements.

Just keeping the speed and reliability up to par in the kind of fast-growth environment the Merc is in can be difficult and demands the attention of its top IT leadership. "We do have to pay attention to it daily," Krause says.

They also need to keep an eye on the future. A lot of common but complicated trades--akin to the butterfly trade--still can't be done electronically. If the Merc doesn't figure it out, its exchange rivals surely will. Donohue says the Merc is now an "applied technology company," and this 150-year-old market needs to learn to have IT as well as financial innovation to succeed. "We're only in the early stages of technology," he says. "There's a lot more to be done."

That should keep Krause and Troxel busy.

with Chris Murphy

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