The National Board of Trade

"When they bring computers in here, things will never be the same." Arnold O'Connor had been a successful trader at the National Board of Trade for 20 years. He enjoyed the pressures and excitement of being a trader and had built a prosperous life for himself and his family by owning a seat on the exchange and trading for his own account. After learning of a proposal to computerize floor trading, he became worried about his future.

The National Board of Trade is one of the largest commodities exchanges in the world and competes with other exchanges on its ability to create the best market for trading. The traditional purpose of these exchanges is buying or selling contracts for future delivery of commodities such as corn or silver at a specific price. Farmers use futures contracts to eliminate the risk that farm prices will drop. Companies that purchase commodities for their manufactured products use futures to eliminate the risk that farm prices will sky rocket. Financial speculators use futures to make money by buying and selling the contracts without ever taking delivery of the goods.

A trade takes place when a buyer's bid price matches a seller's ask price. Trading has traditionally been done using the "open-outcry system," in which traders and brokers work on a large open trading floor called "the pit" and literally yell at each other to convey the latest bid and ask prices. This traditional process has worked for many years, but it takes its toll on the traders, some of whom have had surgery to repair damaged vocal chords. Some traders trade for their own account. Many others perform trades for either financial speculators or businesses wanting to minimize their risk.

The new system will still use open outcry for making trades but will use hand-held terminals to record trades instead of the paper methods of the past. Previously, trades were recorded on small cards collected every half hour and then entered into a computerized accounting system. The hand-held terminals will record the trades immediately and transmit them to a central computer by radio waves. The recordkeeping system was motivated partially by the need to handle paperwork more efficiently. The Board's officials didn't like to discuss another reason, complaints that some traders cheated by "front running." Upon receiving a large buy order, these traders allegedly bought the commodities for their own account at a low price and then sold it to the customer at a higher price.

Recently, the exchanges started analyzing the use of computers to support international trading during the hours when the pits are closed. For these off-hour trades, the open-outcry system can potentially be replaced by several variations of computerized trading. These variations range from totally automatic matching of bid and ask prices to several ways that a person at a terminal could assign bids (offers to buy) to asking prices (offers to sell) and keep the market operating smoothly. Finally, front running will be more difficult with the computerized audit trails that computerized systems can provide. Even so, some skeptics believe that people who want to manipulate prices will figure out ways to do so. The top managers of the National Board of Trade are convinced that data input using the handheld terminals is the way to go. They frankly aren't so sure that international 24 hour trading will succeed, but they feel they must move in this direction because other exchanges are already doing so. They fear that the National Board of Trade will lose business to other commodity exchanges if it cannot establish itself as a leading edge user of technology.

O'Connor is concerned that computerization will gradually drive him out of his job. He sees no direct threat from the data collection system, but worries that it is just the first step leading down a path that could end a very profitable career. He thinks that the overnight trading may show that all the trading can be done through the computer after a few years. He worries about being replaced by a row of people sitting in front of computer terminals in an office in Tokyo, and thinks those people may be replaced a few years later by a single big computer somewhere else. Who would have dreamt of this five years ago? O'Connor knows that many other traders share his fears, and none of them knows what to do about it.

Questions:

1. What are the major business processes in this situation?

2. Consider each of the seven challenges in the chapter and explain how each either does or does not apply to this situation.

3. Assume you are the president of the National Board of Trade and that O'Connor has come to your office and expressed his fears. You are not sure about the future of trading either, but need to respond to him. What would you say?

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