Analysis: Liffe takes the electronic route

The derivatives market is set to supplement open outcry trading with computers

London?s financial market is currently in turmoil, but this time the trigger is technology, rather than currency speculation.

Liffe, Europe?s largest derivatives market, has proposed to move from partial to full electronic trading systems (ETS) by late 1999. All products traded on the floor by open outcry ? a system of frantic hand signs and shouting ? will also be made available for screen-to-screen trading. On 21 May, the board has to sell the idea to members at their EGM.

Despite losing the bulk of a German bond futures market to the fully-electronic ? Deutsche Terman Boerse (DTB) exchange ? the Liffe board says it is not being pressured into electronic trading.

Simon Orebi Gann, Liffe?s IT managing director, said the move to fully electronic systems did not represent a retreat from open outcry. ?It is an affirmation of our policy to develop trading. What we have done is put a date on fully electronic trading and named the products. We are investing in excess of #100 million,? he said.

Gann added that Liffe would continue investing in IT systems to support traditional open-outcry trading, ?because some products can be negotiated more flexibly and powerfully? in person than by computer.

Liffe is keen to play down claims that when people can trade futures electronically with each other around the globe, dealers on the floor will lose their jobs.

ETS sceptics argue that open outcry trading provides a more personal service, combining body language and instinct.

Liffe is not yet clear on two key points: the extent to which electronic trading will replace open outcry trading, and the actual system to be adopted.

?The new automated trading platform will have the capacity to list all major contracts and day-to-day decisions. Decisions such as which products will migrate to the new platform, and whether they will continue to be traded on the floor, will be taken on a case-by-case basis,? the exchange said last week.

To trade shares in the Liffe market you have to be a member of Liffe. Dealers who are not Liffe members have traditionally to pay members to act for them. This has been loosened in Liffe?s latest rule change, so that clients can access the market directly ? after paying a subscription.

This initiative has failed to impress Benn Steil, director of international economics at the Royal Institute of International Affairs. The system of dealers having to pay Liffe members to trade on their behalf dates back to the days when access to the trading floor had to be rationed, according to Steil. But dealers ?don?t need intermediaries in the electronic age,? he added.

IT in Liffe is making some headway. In July, testing will start on Liffe Connect, an electronic trading system for equity options, which is due to go live in November. The system has three main components: a central Sun Microsystems server which matches orders for dealers; a Sequel server database providing a real-time audit of all transactions; and a specially tailored application programming interface (API) allowing the user to access different trading systems on the same computer. With a capability of 250 trades a second, Liffe claims it will be the fastest derivatives exchange in the world.

The new trading system can be used on standalone computers, and Liffe has already signed up Reuters and ICV/Datastream to market the system.

This has opened up a sizeable market, with 43 Liffe members committed to dev- eloping their own trading systems for the launch. In addition, software dev-elopers are eager to design their own trading systems for the new regime.

?When the system started development in 1995, there was the perception that the equity market was in decline and needed to reach a wider audience than is possible with open outcry trading,? said Ross McLean, head of trading systems for Liffe.

McLean expects to have around 80 staff running the system. He stressed the importance of the monitoring system which guards against traders flouting market rules. ?You can?t do this with open outcry,? he said.

Others take a less positive view. Steil said: ?The only members of Liffe who will survive the switch to screen trading are the investment banks. Most traders lack the necessary IT experience?.

Tom Higgins, the IT director for the International Petroleum Ex-change (IPE) ? which sets two thirds of prices for the world?s oil supply ? believes the fut-ure of Liffe is less simple to predict.

?I think Liffe will let members write their own systems based around a central server. This may require one person to relay messages, or it may produce an almost unlimited number of traders, as people can construct their own API system and trade globally.?

Higgins believes that owing to a lack of skilled IT personnel, Liffe is likely to outsource any new system development.

? Report by Nick Huber.