Chicago Merc Wins OK for Electronic Futures Trading

The Chicago Mercantile Exchange, in the face of an FBI fraud investigation, won federal approval Thursday to launch the nation’s first electronic network for futures contract trading, which will be used initially for overnight trading in the United States but could eventually be expanded to operate worldwide.

The Commodity Futures Trading Commission unanimously approved the proposal for the system, called Globex, by changing rules to permit the Merc to trade futures outside regular trading hours.

“Innovation of this type is essential if the U.S. is to maintain its competitive edge and remain a leading provider of financial services to the world community,” CFTC Chairwoman Wendy Lee Gramm said.

Gramm said the commission decided not to change its schedule of reviewing the computer-based system despite an FBI undercover investigation of alleged cheating in the futures markets. Gramm said the commission will take action if the scandal reveals that additional regulatory actions are needed.

Gramm said Globex may help prevent some types of fraud in the commodities futures markets because it will provide regulators with the means to detect cheating. “A computerized system provides an almost perfect audit system,” a Chicago Mercantile Exchange official said.

But for now, Globex will complement but not replace the so-called open outcry trading system, in which brokers and traders crowd into “pits” to execute trades through a combination of shouts and hand signals. Abuses of the open outcry system have been the apparent focus of the FBI investigation.

And Globex could open the doors to fraud by anyone who gains unauthorized access to the computer system. CFTC officials said they are satisfied with security measures associated with the computer system.

Globex will be tested this summer, with an expected start-up date sometime this fall. The Merc plans to use the system between 6 p.m. and 6 a.m. CST on Sunday through Thursday, when regular trading is closed.

Globex will initially be used only within the United States. The New York Mercantile Exchange, the world’s leading energy futures exchange, last month agreed in principle to join the computerized trading system.

But the new system’s hours of operation are intended to attract foreign traders. “It allows a customer in another time zone to take advantage of the liquidity of a certain exchange,” said Andrew A. Yemma, a Merc spokesman. The Merc announced that the Sydney Exchange in Australia will enter negotiations to join the Globex network.

The CFTC allowed Globex trading only for several international currencies, U.S. Treasury bills and gold futures contracts. Eventually, other futures contracts will be traded on the system.

Globex is developing the computerized trading system with Reuters Holdings PLC of London, which will provide the computer hardware and software.

The system will automatically match the best buy and sell orders and monitor traders’ credit limits.

“It stands out by itself,” said Robert A. Crooke of Reuters America. “It’s not matched by anything that exists.” Crooke declined to disclose the cost of the computer system.

Separately, the chairman of the House Agriculture Committee said Thursday that the FBI has ignored a congressional request for information relating to the fraud probe of the Chicago commodities markets.

Rep. E. (Kika) de la Garza (D-Tex.) said his committee wants the information before it begins reauthorization hearings for the CFTC. The House and Senate agricultural committees have jurisdiction over the CFTC, which was formed in 1974.

The FBI had no immediate comment.

THE GLOBEX NETWORK * Computerized system automatically matches best buy and sell orders and monitors traders’ credit limits.

May help prevent some types of fraud by providing regulators with an electronic means to detect cheating.

* Will be tested this summer with start-up expected in the fall.

Will initially operate between 6 p.m. and 6 a.m. CST on Sunday through Thursday, when regular trading is closed.

* Trading will at first be limited to several international currencies, U.S. Treasury bills and gold futures contracts.