oversight

Futures Markets: Information on Six Foreign Automated Trading Systems

Published by the Government Accountability Office on 1990-04-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                   FUTURES MARKETS
                                   Information on Six
                                   Foreign Automated
                                   Trading Systems
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                   United States
GAO                General Accounting Office
                   Washington, D.C. 20648

                   Information Management and
                   Technology Division

                   I+234478

                   April 27, 1990

                   The Honorable Patrick J. Leahy, Chairman
                   The Honorable Richard G. Lugar, Ranking
                     Minority Member
                   Committee on Agriculture, Nutrition, and
                     Forestry
                   United States Senate

                   Exchanges worldwide use various automated systems to trade futures
                   contracts and options on futures contracts.’ Our September 1989 report
                   on the benefits and vulnerabilities of using automation for futures trad-
                   ing noted that six exchanges, two in Japan and one each in Australia,
                   England, New Zealand, and Switzerland, use or plan to use automated
                   systems for trading futures.2 Your office asked for additional informa-
                   tion on these systems. Specifically, our objective was to provide back-
                   ground information on each system, including: when the exchanges
                   began automated futures trading, their current or planned operating
                   hours, the types and volumes of contracts traded, and the exchanges’
                   automated trading processes.


                   Our review showed that four exchanges use or plan to use their auto-
Results in Brief   mated trading systems to trade all their futures contracts, while two
                   retain more traditional trading processes and use their automated sys-
                   tems for after-hours trading. Since 1985, the New Zealand Futures
                   Exchange has used automated trading systems for all its futures trad-
                   ing. Similarly, the Tokyo Stock Exchange and the Tokyo International 1
                   Financial Futures Exchange have used automated trading systems for
                   futures trading since 1988 and 1989, respectively. The Swiss Options
                   and Financial Futures Exchange also plans to use its system for all
                   futures trading later this year.3 Conversely, the Sydney Futures
                   Exchange and the London International Financial Futures Exchange,
                   which began automated futures trading in 1989, use their systems for

                   ‘A futures contract is an agreement to buy or sell a commodity for future delivery at a price deter-
                   mined at initiation of the contract. An option on a futures contract gives the buyer the right, but not
                   the obligation, to perform on the terms of the contract within the life of the option. For purposes of
                   this report, trading of futures contracts and options on futures contracts is referred to as futures
                   trading.
                   ‘Futures Markets: Automation Can Enhance Detection of Trade Abuses Hut Introduces New Risks
                   K=W- r 1 -
                   “Although the Swiss Options and Financial Futures Exchange is not scheduled to start trading futures
                   contracts until the fall of 1890, the system is currently used to trade options on securities.



                   Page 1                                  GAO/IMTEC90-43FS        Foreign   Automated   Trading   Systems
Appggdix II ’

Customer Order Flow on Six Foreign
Exchanges’ Systems

                                             Our review of automated trading systems used by the six foreign
                                             exchanges found that similar processes are used for futures trading, and
                                             that such trading is limited to exchange members. Other organizations
                                             and individuals that want to trade futures must place their orders
                                             through exchange member brokers.’ However, we also found that differ-
                                             ences exist in how some systems receive customer orders and in how
                                             trades are matched. Figure II. 1 depicts the typical customer order flow
                                             through the six automated systems.

Figure 11.1:Customer   Order Flow on Six Foreign Exchanges

    Customer                                          Broker                                                   Exchange




     General




                                         b
      Public




                        order to trade

      Financial
     institutions
                                                                         4
                         trade results                                          trade results
                                               Exchange Member                                             Automated Trading
                                                      Firm                                                      System




                                             aTokyo lnternattonal Frnanctal Futures Exchange only; an exchange clerk Inputs trade data received
                                             from member brokers

                                             bUnmatched orders are stored In prrce and trme prionty for posstble executron, wrth the exception of the
                                             London lnternatronal Ftnanctal Futures Exchange system which requires orders to be penodtcally
                                             reentered rather than stonng them
                                             ‘Tokyo Stock Exchange only, system provrdes an order-matchrng member with matched and
                                             unmatched orders, the order-matchrng member inputs tnstructions to execute trades.


                                             The systems used by the New Zealand Futures Exchange, the Swiss
                                             Options and Financial Futures Exchange, and the Sydney Futures
                                             Exchange automatically execute trades submitted by member brokers
                                             when buy and sell prices coincide. The systems maintain and prioritize

                                             ‘A broker is an agent who buys or sells for a principal on a commission basis.



                                             Page 7                                  GAO/IMTEG90-43FS        Foreign   Automated   Trading   Systems
---i-
            B-234478




            This work was performed under the direction of Howard G. Rhile, Direc-
            tor, General Government Information Systems, who can be reached at
            (202) 275-3455. Other major contributors are listed in appendix III.




            Ralph V. Carlone
            Assistant Comptroller   General




        Y




            Pagr 3                      GAO/IMTEG90-43FS   Foreign   Automated   Trading   Systems
Page 5   GAO/IMTEXXJO43FS   Foreign   Automated   Trading   Systems
Y




    Page 5   GAO/IMTEC9O43FS   Foreign   Automated   Trading   Systems
i’

     B-234470




     This work was performed under the direction of Howard G. Rhile, Direc-
     tor, General Government Information Systems, who can be reached at
     (202) 275-3455. Other major contributors are listed in appendix III.




     Ralph V. Carlone
     Assistant Comptroller   General




     Page 3                     GAO/IMTEG9043FS   Foreign   Automated   Trading   Systems
                 t

          .’         ,

Appe-qdix II

Customer Order Flow on Six Foreign
Exchanges’ Systems

                                                   Our review of automated trading systems used by the six foreign
                                                   exchanges found that similar processes are used for futures trading, and
                                                   that such trading is limited to exchange members. Other organizations
                                                   and individuals that want to trade futures must place their orders
                                                   through exchange member brokers.’ However, we also found that differ-
                                                   ences exist in how some systems receive customer orders and in how
                                                   trades are matched. Figure II. 1 depicts the typical customer order flow
                                                   through the six automated systems.

Figure 11.1:Customer         Order Flow on Six Foreign Exchanges

    Customer                                                Broker                                                   Exchange




     General
      Public




                              order to trade
                                               b
      Financial
     Institutions
                         +                                                     4
                               trade results                                          trade results
                                                     Exchange Member                                             Automated Trading
                                                            Firm                                                      System


      Industry


                                                   aTokyo lnternattonal Flnanclal Futures Exchange only; an exchange clerk Inputs trade data received
                                                   from member brokers.

                                                   bUnmatched orders are stored In price and time prionty for possible execution, with the exceptlon of the
                                                   London InternatIonal Flnanclal Futures Exchange system which requires orders to be perlodlcally
                                                   reentered rather than storing them.
                                                   CTokyo Stock Exchange only; system provides an order-matching member with matched and
                                                   unmatched orders, the order-matching member Inputs Instructions to execute trades


                                                   The systems used by the New Zealand Futures Exchange, the Swiss
                                                   Options and Financial Futures Exchange, and the Sydney Futures
                                                   Exchange automatically execute trades submitted by member brokers
                                                   when buy and sell prices coincide. The systems maintain and prioritize

                                                   ‘A broker is an agent who buys or sells for a principal on a commission basis.




                                                   Page 7                                  GAO/IMTEC-9043FS        Foreign   Automated   Trading   Systems
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20648

                   Information Management and
                   Technology Division

                   I+234478

                   April 27, 1990

                   The Honorable Patrick J. Leahy, Chairman
                   The Honorable Richard G. Lugar, Ranking
                     Minority Member
                   Committee on Agriculture, Nutrition, and
                     Forestry
                   United States Senate

                   Exchanges worldwide use various automated systems to trade futures
                   contracts and options on futures contracts.’ Our September 1989 report
                   on the benefits and vulnerabilities of using automation for futures trad-
                   ing noted that six exchanges, two in Japan and one each in Australia,
                   England, New Zealand, and Switzerland, use or plan to use automated
                   systems for trading futures.2 Your office asked for additional informa-
                   tion on these systems. Specifically, our objective was to provide back-
                   ground information on each system, including: when the exchanges
                   began automated futures trading, their current or planned operating
                   hours, the types and volumes of contracts traded, and the exchanges’
                   automated trading processes.


                   Our review showed that four exchanges use or plan to use their auto-
Results in Brief   mated trading systems to trade all their futures contracts, while two
                   retain more traditional trading processes and use their automated sys-
                   tems for after-hours trading. Since 1985, the New Zealand Futures
                   Exchange has used automated trading systems for all its futures trad-
                   ing. Similarly, the Tokyo Stock Exchange and the Tokyo International 1
                   Financial Futures Exchange have used automated trading systems for
                   futures trading since 1988 and 1989, respectively. The Swiss Options
                   and Financial Futures Exchange also plans to use its system for all
                   futures trading later this years3 Conversely, the Sydney Futures
                   Exchange and the London International Financial Futures Exchange,
                   which began automated futures trading in 1989, use their systems for

                   ]A futures contract is an agreement to buy or sell a commodity for future delivery at a price deter-
                   mined at initiation of the contract. An option on a futures contract gives the buyer the right, but not
                   the obligation, to perform on the terms of the contract within the life of the option. For purposes of
                   this report, trading of futures contracts and options on futures contracts is referred to as futures
                   trading.
                   %‘utures Markets: Amomation Can Enhance Detection of Trade Abuses Iht Introduces New Risks
                   (GAO/rFfTEC-W-68, Sept. 7, 1989).
                   :rAlthough the Swiss Options and Financial Futures Exchange is not scheduled to start trading futures
                   contracts until the fall of 1990, the system is currently used to trade options on securities.



                   Page 1                                  GAO/IMTEG90-43FS        Foreign   Automated   Trading   Systems
Aljpendix III

Major Contributors to This Report


Information            William D. Hadesty, Technical Assistant Director
Management and         Leonard Baptiste, Jr,, Evaluator-in-Charge
                       Richard B. Weinstock, Staff Computer Scientist
Technology Division,   Ann Farabaugh, Staff Evaluator
Washington, D.C.

                       William P. Leavens, Senior Evaluator
European Office        Richard J. Boudreau, Staff Evaluator


                       Glenn J. Chaney, Senior Evaluator
Far East Office        Suzanne P. Nagy, Staff Evaluator




(dlO4HH)               Page 9                      GAO/IMTEC90-43FS   Foreign   Automated   Trading   Systems
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