Making a Choice

What does it mean when the most powerful floor-based exchange in the world introduces a hybrid marketplace? It can only mean one thing: This is the beginning of the end of the auction market. Although Bob McSweeney, senior vice president for competitive position, New York Stock Exchange, says the Big Board has no intention of going all-electronic, the writing is on the wall. The futures and options exchanges have undergone similar transitions, yielding to the changing times and maturing technology, by creating exchanges that blend both human-based trading with automated trading. Despite their progressive attitudes, the exchange with the highest volume in that marketplace is the two-year-old International Securities Exchange, an all-electronic marketplace.

This is a clear indication that electronic markets have an edge over floor-based and even hybrid markets. It illustrates that, often, compromises aren't the best solution. With a compromise, no one is 100 percent satisfied, and the results can be so-so. To optimize results, a clear choice has to be made.

In this case, the compromises that the NYSE is making at least mean that it is heading in the right direction. No one thought it possible that the Big Board would ever take such an enormous step toward change. However, once it begins to face both the astronomical costs and the complexities of running both a floor and an electronic exchange, it may be forced to make a new choice. Perhaps if a hybrid market were the perfect solution, these obstacles could be withstood. But a hybrid market is complex to operate and is not without flaws, as WS&T Editor at Large Ivy Schmerken brings to light in our cover story, beginning on page 20.

The Chicago Mercantile Exchange seems to have the right idea. It's moving quickly to educate its floor traders about the intricacies of electronic markets (see story, page 40), as it believes, "over time, that we're going to see a transition to a more or less fully electronic state," says its CEO. By training floor brokers in screen-based trading, a new dynamic may arise. Their expertise on the floor may help them interpret screen-based trading in ways we can't imagine.

One thing is clear: A more efficient, equitable and investor-friendly marketplace is one that is electronic. As Dale Carlson, VP, corporate affairs for the Pacific Stock Exchange, says, "At the end of the decade, there probably isn't going to be an exchange in the country that is operating a traditional trading floor." As sad as it is, I think it's time to say goodbye to a 212-year-old tradition.