When undercover FBI agents infiltrated Chicago's futures exchanges in the late 1980s, they found that traders could cheat customers by changing prices with a simple stroke of the pen. The paper cards used to record trades hadn't changed appreciably since the 19th century. Now, if the Chicago Board of Trade has its way, that horse-and-buggy system could last into the next millennium.
The CBOT wants to postpone the introduction of handheld computers--tamper-proof devices that would replace trading cards. With the tacit assent of the Chicago Mercantile Exchange, the CBOT wants four more years to meet tough trade-monitoring standards imposed by Congress that would otherwise go into effect in October, 1995. Oh, the exchanges have a device that can do the job. But they aren't going to introduce it without being pushed.
PATHFINDER. It's easy to see why. The Audit trading computer would complicate life in the pits, forcing hidebound traders to change the way they do business and increasing surveillance by electronically recording every trade in sequence. The computer would prevent abuses of dual trading, a controversial practice in which brokers filling customer orders can simultaneously trade for their personal accounts. One such abuse, front-running--brokers trading ahead of their customers to get a better price--would be easily detected by Audit.
Ironically, the exchanges have made a good-faith effort to develop handhelds so far. Under pressure from the Federal Bureau of Investigation's sting, which snared 46 traders on fraud-related charges, the Board of Trade and Merc spent $12 million in a joint effort to develop Audit. The computer allows traders to write on a screen modeled after the paper-trading cards.
Yet Board of Trade leaders have distanced themselves from their creation. After saying for years that a computerized audit trail would best deter fraud, the CBOT now contends that paper and ink are good enough. After promoting the practical benefits--reducing errors and saving back-office expenses--the exchange says the computers' cost would put it at a disadvantage to its non-U.S. competitors. And after promoting the cutting-edge design of Audit, some CBOT bigshots argue that the machine is too heavy and slow--and couldn't be used without massive technological advances. "We could spend $100 million and not be any further along than we are now," says CBOT Chairman Patrick Arbor.
Nonsense. "Spend another $5 million, and you'll be light years ahead," counters John T. Geldermann, who heads Audit development at the Merc. Indeed, the two exchanges can well afford it, with volume up 45% and pretax profits expected to top $60 million this year. Geldermann and some officials close to the project at the Board of Trade say the units could be operating on a limited basis within months. Although the Merc has not joined the CBOT in asking for a delay, it's not likely to meet the 1995 deadline, either.
NEW CHIEF. Now, it's up to the Commodity Futures Trading Commission. After years of weak leadership, the CFTC is slated to get a highly regarded new chairman, Securities & Exchange Commissioner Mary L. Schapiro. As she evaluates Audit, Schapiro may find that even with a good-faith effort, the exchanges won't be able to meet the required standards by 1995. No one would expect the deadline to stand if it meant disrupting the markets. But Schapiro should not let the exchanges use that as an excuse to back off Audit for four additional years.
The CFTC should consider prodding the exchanges to go full throttle on Audit by banning dual trading until the system is up and running. The Merc already operates under a partial ban that has done nothing to hurt market liquidity. Sure, the exchanges have improved their surveillance. But Audit would be a bigger step forward--and make them more efficient to boot.