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people can express their preferences only noted that satisfaction of qualitative pref- to validate its performance. in terms of ordering among a set of things. erence is difficult to achieve after optimal The IET system is a new form of market: If a person is given a choice between A transaction and quantity are found. it aims to create a new market microstruc- and B, he can say: The qualitative preference should be sat- ture for exchanges. Thus this 1. he prefers A to B, or isfied while the economic model simulta- study is significant to trading system de- neously maximizes the total exchanged velopers for commodity items such as 2. he prefers B to A, or . For this reason, the trade match cotton, grain, cattle, hogs, coffee, tea, 3. he is indifferent between the two. algorithms of IET integrate both approach- and sugar. During the past decade, or- Given these expressions of individu- es in a dynamic way so that the logical ganizations in various industries have als, the social choice model derives a inference approach for preference satis- captured a significant portion of their market choice that optimizes the satis- faction can interweave with the mathe- markets through the strategic use of in- faction of preferences of individual trad- matical computation for market equilibri- formation technologies. The IET system ers. um during the market process. The dy- enables organizations involved in com- namic integration of logical inference and modity exchanges to increase their mar- Constraint Logic Programming simplex method in CLP allows us to apply ket by applying information tech- CLP (Constraint Logic Programming) complex trade match rules in order to nology earlier than their competitors. is employed as new information technol- satisfy qualitative preferences, while the ogy to structure and implement the trade economic model simultaneously search- match algorithms of IET. CLP is an exten- es for market equilibrium. sion of logic programming where unifica- tion (symbolic pattern matching) is re- Concluding Remarks * Ho Geun Lee is a Ph.D. student of the placed by constraint satisfaction. In CLP This study illustrates how an econom- University of Texas at Austin and is cur- qualitative preferences are expressed as ic theory can be integrated with a social rently working for EURIDIS (Erasmus symbolic relations and are logically in- choice theory in order to improve the University Research Institute for Deci- ferred to draw conclusions. On the other trade matches of commodity orders in sion and Information Systems) as a visit- hand, a mathematical solver like the sim- electronic trading. We are currently de- ing researcher. Prof. Dr. Ronald M. Lee is plex method searches for market equilib- veloping a prototype of IET. We plan to do Director of EURIDIS at the Erasmus Uni- rium using price and quantity. It should be market simulations with the prototype in versity in Rotterdam.

How Financial Markets are Going On-line heart of any trading operation. Conse- quently, the major international markets Discussions of electronic securities markets in the 1970s revolved around the from Japan to are making question of whether computers could support the processing requirements of increased use of IT. While IT is capable of modern, high-volume trading. In the 1980s, we asked when will screen-based making the traditional trading floors ob- markets replace traditional floor exchanges. The questions of whether and when solete and supporting 24-hour interna- have been answered. In the 1990s the question is who will be left behind. tional markets, no consensus is emerg- ing on the design of an integrated global , and many technological Many industries today claim to be in journeys, thus accelerating market news and regulatory issues remain unsolved. the midst of an “Information Technology from a week to half a day. The Transat- Multiple, fragmented markets may be a (IT) Revolution.” Purchasing airline tick- lantic cable, which in 1866 established consequence of the lack of coordination. ets, making hotel, or theater reserva- telegraph communication between New Despite its presence, IT’s influence York and , affected pricing and on financial markets themselves contin- * by Prof. Dr. Bruce W. Weber changed trading practices in those cities’ ues to be a subject of debate and contro- New York University , , and markets [3]. versy. Time lags of 20 days were reduced to tions, and withdrawing from the minutes, and the average absolute price after business hours are nearly certain to differences for identical securities traded Financial Market Functions occur through on-line systems. Manu- in the two cities’ markets dropped 69 Financial markets perform four func- facturers and their suppliers are creating percent from their previous levels. Tho- tions in the economy: mas Edison’s electromechanical stock electronic links for ordering parts, main- 1. Raising capital: Expanding into new ticker (1867), and Alexander Graham taining inventories, and distributing de- markets, building roads and plants, Bell’s telephone (1876), were also rapidly sign details for new products and compo- and initiating the development of new adopted and enabled financial markets to nents. Many of these initiatives began products and services requires fund- extend their reach and importance in the within the past 15 years as the price- ing that often comes from issuing economy. New York-based brokerage performance characteristics of comput- or equity securities. ers and telecommunications networks houses that established a presence in 2. Enabling wealth to be transferred improved dramatically. other parts of the country became known as “wirehouses” for their reliance on tele- across time periods: For instance, a graph communications. IT will maintain new home buyer borrows to- IT in Financial Markets its crucial role in supporting market activ- day to be repaid in the future, while In financial markets, the IT Revolution ities: no today ope-rates without those with net savings can invest or began over 150 years ago. The tele- real-time data services and computer- lend money today to provide them- graph, invented in 1838 by Morse and based analytical tools. Market informa- selves with greater wealth in the future. Vail, was quickly used to transmit tion about prices, interest rates, transac- 3. Meeting the demand for resales that between New York and Philadelphia and tions, investor , and match investors wishing to sell with New Orleans, replacing horse and train company and economic news is at the those wishing to buy. A purchaser of

EM - Electronic Markets / No. 9-10 / October 93 / Page 6 bonds that will mature (i.e., are fully- In 1992, 78 percent of NYSE orders action costs. Integration and internation- paid off) in 30 years may not want to arrived via DOT. The remainder arrive al linkages can be achieved with systems hold the until the maturity date, via phones to floor traders’ booths. that share information between markets and will often choose to sell at an 3. Price determination: This function is and enable participants to pass their po- intermediate time. and often supported by systems that ag- sitions from one market to another. A other financial markets match buyers gregate the orders. The Arizona Stock number of markets including the CME and sellers and facilitate trading. Exchange (AZX) is a screen-based and the International Mone- 4. Providing for the 'discovery' of the pric- market for trading after the close tary Exchange (SIMEX) have automated es at which trades should occur, and of the NYSE floor. It uses a single price facilities for “mutual offset”. With mutual thus place values on assets and the call auction mechanism to find a price offset, a in one market can be companies that reflect their risk and at which the quantity to buy equals the used to offset the required in their prospects for growth and profita- quantity to sell. another market. For instance, a 15 con- tract long position acquired in Chicago in bility. 4. Order execution and confirmation: T-bond futures, which is offset by a ’ Dealing 2000 system is an position of 10 contracts of the same in- The Principal Financial Markets example where buy and sell orders in strument in Singapore, requires margin Most traded instruments such as com- the are to be put up for just the net position of 5 mon stock or equity, bonds, notes and matched electronically. Details of exe- contracts. efficiency is en- bills fall into one of several standard cat- cuted trades are transmitted back to hanced with systems. The number of egories, and markets may differ depend- the trade participants for confirmation. questioned trades (QTs), don’t knows ing on the timing of the asset’s transfer. No more than several seconds elapse (DKs), and fails drops when trading is Often, a transaction occurs today for a between order entry and final trade automated and trade details are captured that the purchaser confirmation. electronically, reducing costly exception may not own for several months or years 5. Trade reporting and surveillance pur- processing. The data vendors such as into the future. In cash or spot markets, Reuters and the exchanges themselves ownership of the traded instrument is poses: In the case of a fraud or market spend a large percentage of their operat- transferred immediately. Options con- manipulation, an audit trail of trades ing budgets on technology for informa- tracts confer the right to buy or sell an can speed investigations. An example tion retrieval and trading support. The asset or financial instrument at a speci- is the StockWatch system at the NYSE. NYSE spent a third of the 1990 budget of fied during the contract life- 6. Broad dissemination of market infor- $300 million and London’s LIFFE de- time, which ends on the ’s expira- mation: The Consolidated Tape Sys- votes 35 percent of its operating budget tion date. In forward or futures markets, a tem (CTS) was introduced in 1976, to IT. The Securities and Exchange Com- price and a delivery date for the transfer and imposed unified trade reporting mission (SEC), the industry regulator in of ownership sometime in the future are rules, and facilitated ticker publication the U.S., is currently phasing in its Elec- specified. Futures and options are called of last sale information occurring in any tronic Data Gathering, Analysis and Re- securities because their prices are derived from the cash market price for the underlying asset. The derivatives mar- Dealing Room Back-Office kets are among the most rapidly growing Systems Systems financial markets. Volumes at the Chica- go Board of Trade (CBOT) and the Chica- Trade orders Trade Confirmations go Mercantile Exchange (CME), the world’s two largest futures markets, tri- Listings, pled between 1982 and 1992. Both ex- Market Governing Screen-Based Matched and changes are using IT to maintain their Body Member- Market System Trade Settlement Systems Reports international dominant position. ship data

Trading Technology Surveillance Data Trade Data and News Automation serves a number of func- Market Regulatory Third-Party Market tions in financial markets, yet most mar- Authority Data Vendors kets are incompletely automated and re- tain some manual functions. The follow- Figure 1: Representation of automated financial markets ing market functions are amenable to automation: of eight U.S. stock markets. Previously trieval system (EDGAR) for on-line filing only NYSE and American Stock Ex- of public disclosure documents from cor- 1. Order collection: With IT, once an or- change (AMEX) trades were reported porations and investment managers. der is entered, details such as size, on the ticker. EDGAR will cost $75 million, and by mid- limit price, and time are accessible for 1996 will replace paper filings which total an investor’s control and measurement Benefits and Costs of IT 10 million pages per year from the 14,000 purposes, and for transmitting to a IT has many benefits in financial mar- companies registered with the SEC. chosen market system. kets. First, visibility is increased, enabling 2. Order routing: The DOT system (Des- investors to monitor the market, and to Foreign Exchange ignated Order Turnaround) was intro- time the execution of their trading strate- We now look at a few examples of on- duced in 1976 for order routing on the gies. Systems provide the ability to han- line-markets. Today’s most active and New York Stock Exchange (NYSE). It dle increased volumes of business, and most automated global market is in for- enables member firms to electronically contribute valuable economies of scale. eign . In 1992, daily turnover route and limit orders from their offices In automated markets, greater trading was estimated at close to $1 trillion. Over to the specialist post on the market volumes lead to fractional increases in a third of all FX trades today are executed floor, bypassing the floor broker’s booth. overall costs, and a lowering in per trans- on-line between market participants

EM - Electronic Markets / No. 9-10 / October 93 / Page 7 spread across the globe. Table 1 shows number of shares the is P.M. session. In September 1993 Globex the largest FX centers, but significant willing to commit to at those prices. For was handling 30,000 contracts a day via trading also occurs in Singapore (fourth, instance, 50~50 means 50'000 shares 385 linked terminals, up from 1,800 con- with $80 billion traded daily in 1992), bid and 50'000 shares offered, and 1L tracts daily in the month after the launch. Zurich, Toronto, and . The FX means 100'000 shares. The inside quotes Hence, Globex' activity is just 2% of the on the SEAQ screen represent the best volume of the two Chicago floor markets. ($ billion) March 1986 April 1992 April 1992 bid and offer available in London. They London 90 187 303 are prominently displayed, double sized, Conclusions

New York 58 129 192 in a yellow strip at the top of the screen for This article surveyed some computer each stock. The intent is to give a rapid 48 115 128 innovations that are transforming the fi- and accurate indication of the price at nancial market worldwide. Today’s mar- Total 196 431 623 which the next trade in any share could be kets are increasingly based on screen Table 1: Daily FX trading volumes expected to occur. Once a trade is exe- price displays, and traders often operat- cuted, the details of price and number of ing from well-equipped dealing rooms, market is dominated by the world’s larg- shares are transmitted to the Exchange rather than physical trading floors. Fur- est , most of which trade currencies which then publishes the stock’s cumula- ther financial markets around the world 24 hours a day from technologically so- tive trading volume and the prices of the are in the midst of a dramatic transforma- phisticated dealing rooms in the major most recent transactions on the screen tion. Regulatory and market barriers have financial centers. There is no market floor above the yellow strip. By negotiating fallen, and automation continues to re- for institutional trading of over the phone, a trader can usually buy structure trading processes, lowering the currencies. The FX trader’s desk con- and sell in larger quantities than those costs of transacting and monitoring finan- tains an abundance of information sys- shown, and market makers will often trade cial markets. Observers have declared tems and data feeds which together have at prices different than those on the screen. “The End of Geography”[6] in financial an annual cost of $30'000 to $50'000. SEAQ was modeled on the NASDAQ markets, for location plays a greatly di- Four primary components are: (National Association of Securities Deal- minished role in investors’ decisions. In- 1. High-density phone system with speed- ers Automated Quotations) market in the ternational market integration is occur- dialing, display keys for counterpar- US, which was introduced in 1971 as a ring at a rapid pace, and globalization is ties, and buttons for muting the phone screen display of trading prices for OTC no longer a buzzword; it has arrived. and for multiparty conversations. stocks. NASDAQ and SEAQ enable deal- 2. Real-time provided by ers to be geographically dispersed. In fact, international SEAQ market makers third-party vendors such as Reuters [1]ReferencesClemons, E.; Weber, B.: London’s (49 firms in January 1993) are located in and Telerate. Big Bang: A Case Study of Informa- cities like or Frankfurt. Due to its tion Technology, Competitive Impact, 3. Computer-based analytics to chart pric- location and its use of IT, London is the es, and analyze relationships among and Organizational Change, in: Jour- financial instruments and economic nal of Management Information Sys- ($ billion) 1.Q. 1983 1987 1991 1992 data. 1993 tems, 6(1990)4, pp 41-60. [2] Clemons, E.; Weber, B.: Information 4. On-line transaction processing system SEAQ nil 0.433 1.12 1.30 1.85 for data capture and transfer from one International Technology and Changing Nature of the Industry, in: account to another via an electronic SEAQ 0.445 2.06 1.42 1.71 2.21 funds transfer system (such as CHIPS Domestic Proceedings, IFIP TC8 Conference on Collaborative Work, Social Com- in the U.S.). Table 2: Daily equities trading volumes in munications and Information Systems, The 1973 introduction of the Reuters London Helsinki 1991. Monitor, which displays competing bank most global stock exchange today, listing [3] Garbade, K.; Silber, W.: Technology, dealers’ FX quotes, spurred the develop- about 760 non-UK stocks, compared with Communication and the Performance ment of the FX market. About 177,000 121 foreign stocks traded on the NYSE. of Financial Markets: 1840-1975, in: Reuters terminals were installed around With SEAQ, the exchange succeeded in Journal of Finance, 33(1978)3, pp the globe in 1990. Each terminal can establishing an interactive market for trad- 819-831. access 73'000 pages of continuously up- ing of non-UK securities away from their [4] Scarlata, J.: Institutional Develop- dated financial news and market prices. home exchanges. The growth in trading ments in the Globalization of Securi- In 1981, Reuters introduced Dealing, an volume on SEAQ International (see Ta- ties and Futures Markets, in: Review, interactive dealing system that enables ble 2) has outpaced that of the UK do- Federal Reserve Bank of St. Louis, subscribers to negotiate and execute FX mestic in recent years. January/February 1992, pp 17-30. trades over their terminals. For the first [5] Weber, B.: Information Technology in terminal at a site, Monitor costs $1'800 a Globex the Major International Financial Mar- month and Dealing is $5'400. About kets, forthcoming in: Deans, P.C., 19,000 Dealing terminals existed in 1992. Globex was initiated by Reuters and the CME with tremendous fanfare in Sep- Kewan, K.R. (eds.): Global Informa- tember 1987. Under pressure from mem- tion Systems and Technology: Focus London Stock Exchange bers that saw duplicate development as on the Organization and its Function- In 1985 the London Stock Exchange wasteful, the CBOT abandoned its com- al Areas, 1993. introduced SEAQ-International, a screen- peting Aurora project in March 1991, and [6] O'Brien, R.: Chief Economist, Ameri- based dealer market for the shares of joined Globex as a sponsor. Globex was can Express Bank, London. foreign companies. In each stock, there developed at a cost of $80 million, and are a number of dealers, or market mak- opened in June 1992. It is not a 24-hour ers, that provide bid quotes (price for market, and only operates after the 2:30 buying shares from customers), and ask P.M. close of the Chicago floor markets. * Dr. Bruce W. Weber is an Assistant quotes (price for selling shares to cus- Trading hours are 6:00 P.M. to 6:00 A.M., Professor at the Information Systems tomers). There is also an indication of the but plans exist to add a 2:30 P.M. to 4:00 Department at the New York University.

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