Exchanges Plan New Equipment to Post Trades : Tamper-Proof Device Will Record Commodity Deals Instantly, End Paper Work

The world’s two largest commodities exchanges, under the gun to clean up fraudulent practices in their trading pits, said Wednesday that they will jointly develop new hand-held electronic equipment that will make it more difficult for traders to falsify their records.

The Chicago Board of Trade and the Chicago Mercantile Exchange jointly announced here that they are investing $5 million to have the tamper-proof electronic trading equipment, which does not yet exist, developed by the computer industry within a year.

It will replace a time-honored but antiquated process using paper cards that critics say has kept the commodities markets out of the computer age for far too long.

Rather than writing down their transactions on decks of paper cards for later collection, as traders do today, under the proposed system they instead would punch trades into the hand-held devices. The equipment would automatically record the exact time and nature of each transaction and then send the data back to a larger computer system.

Eventually, exchange officials said, they hope to develop an information system that will make it possible for trade orders to flow electronically back and forth between brokerage clearing houses and traders on the floor.

“This is all working toward a paperless trading floor,” said John T. Geldermann, chairman of the board of governors of the Mercantile Exchange.

46 Indicted

Exchange officials acknowledged that they see the introduction of electronic devices as a way to protect their colorful and frenzied “open outcry” trading practices from further government regulation in the wake of the highly publicized FBI undercover investigation of trading abuses on the floors of the two exchanges.

That sting operation led to the indictments earlier this month of 46 traders and brokers on fraud and racketeering charges, at least five of whom have already pleaded guilty in federal court here. Prosecutors and defense attorneys were in federal court here Wednesday seeking to schedule 1990 trial dates for some of those who have pleaded innocent.

Federal law enforcement officials charge that their undercover operation found that some traders took advantage of the open outcry system, and its reliance on handwritten trading records, to falsify the timing and pricing of customer trades.

The proposed electronic equipment “does preserve the open outcry system, because it makes it compatible with the technology that today’s world demands,” said Thomas Donovan, president of the Board of Trade.

“This will put any questions to bed” about the legitimacy of trading under the open outcry system, added Karsten Mahlmann, chairman of the Board of Trade. “There will be no more questions; the trade is recorded as it is made.”

They also said the move should help shore up investor confidence in Chicago’s commodities markets. Although neither exchange has been implicated in the abusive practices of individual traders, exchange officials concede that the indictments have damaged the credibility of the Board of Trade and the Mercantile Exchange.

They noted that the modest reforms previously announced by the exchanges since the scandal was revealed--including the formation this week of an ethics panel at the Board of Trade--”were not enough.” They added that the hand-held electronic system will provide “an audit trail . . . in which there will not be any question as to when a transaction occurred,” said Leo Melamed, chairman of the executive committee of the Mercantile Exchange.

“We will have an audit trail that will provide us with a mechanism that will prevent the abuses (uncovered by the federal investigation), and to catch every single abuse that someone might dare attempt”, Melamed said.

Clearly, however, Congress’ reaction to the Chicago scandal was uppermost in the minds of the exchange officials Wednesday. Since the federal investigation first came to light, Congress has been pushing for better customer protection in the markets, especially for individual farmers who use the exchanges as a way to hedge against fluctuating prices for their crops.

A bill sponsored by Rep. Glen English, (D-Okla.) has just been approved by the House Agriculture Committee that calls for the exchanges to install, within three years, an auditing system that would be able to record every trade within 30 seconds of when the transaction took place in the pits.

Donovan of the Board of Trade said the hand-held system to be developed by the two exchanges would meet the requirements of English’s legislation.

English, chairman of the House Agriculture subcommittee on conservation, credit and rural development, said Wednesday that he was encouraged by the action taken by the exchanges.

“The announcement is very good news. It’s a step in the right direction,” English said in an interview.

Still, the exchanges seem to have had little choice but to modernize after this year’s scandal.

“Both the Board of Trade and the Mercantile Exchange know the futility of taking positions against good record-keeping,” since so many abuses have been uncovered, said John M. Damgard, president of the Futures Industry Assn., an industry trade group. “It’s like motherhood and apple pie.”