Ask a Broker

June 2007

Q: I see the same products sometimes trading on different exchanges. Which should I choose, and are they fungible? What do I need to know as a trader when placing orders in these different markets?

This month, Lind Plus Senior Market Strategist Michael Hinman answers:

A: This new age of electronic trading brings new decisions for traders. Which market should I trade, and why? I'm not talking about choosing different products, such as soybeans or gold—hopefully you've already decided what commodities you want to trade. But for a number of products, you have another set of decisions. Should you choose to trade soybeans in the pit (open-outcry) at the Chicago Board of Trade, or soybeans on the screen via CBOT's electronic e-cbot platform? Should you pick pit-traded gold futures at the New York Mercantile Exchange, or their gold contract listed on the CME's Globex electronic platform? Or, should you instead trade gold futures on e-cbot? There are pros and cons to the various choices. Let's start with choosing between pit-traded and electronic contracts.

Pros of Electronic Trading

It appears electronic trading is here to stay, and you can see the evidence clearly in the volume figures. In less than a year since they were listed on the screen, the CBOT's electronically traded (e-cbot) grains contracts account for roughly 70 percent of the volume in soybean, corn and wheat futures, while about 30 percent is traded via open outcry. As an example in financial futures, more than 90 percent of the volume in 10-year Treasury note futures is traded on e-cbot. The same pattern continues across the industry, and it's fairly easy to see why.

Electronic trading offers access around the clock. You don't need traders standing in a particular pit at a particular location at a particular time to execute your trade. Computers don't need to sleep. Generally speaking, if the same contract is traded at the same exchange in both the pit and screen, they are fungible. For example, if you were to place an order at midnight in the 10-year Treasury note futures on e-cbot, you can offset your trade the next day in the CBOT's pit-traded Treasury note futures once that market opens. The bid/ask spreads have become just as tight on the screen, and in some cases, tighter. And, most of the same orders are accepted in electronic markets. Orders are generally filled in sequence they were received, and you usually know instantly if you are filled and at what price.

Cons of Electronic Trading

The "fat finger" is one major drawdown to electronic trading, and it affects the less liquid markets the most. Although a fairly rare event, a "fat finger" error occurs when a trader wants to buy or sell 1,000 contracts, for example, but accidentally types in 10,000. In most cases, a market can't handle that size in one order, and prices will go out of whack fairly quickly. This affects anyone with a position or working order, and can bring undeserved havoc to the marketplace. Exchanges do of course have procedures in place to try and remedy such errors, but remember, when you trade electronically, you can be affected by human error just as you can be in a open-outcry venue. And, be sure you double-check all your own orders, because when you trade online, you don't have another set of eyes on the screen to verify your trade.

If you are trading options, particularly complex strategies, sometimes open outcry might be the better choice. Electronic options have not generally seen the explosion of volume that futures have, and in some markets, you will have to place an order through open-outcry because the volume is too thin in a particular strike. Some of the more liquid options on the screen include E-mini S&P and 10-year Treasury note futures.

Order Types

As I mentioned before, certain order types may not be accepted on certain platforms, markets, or exchanges. So if you must place a special order, for example, fill-or-kill, you'd want to know e-cbot won't accept that type. Below is a table to help you determine what order types are acceptable on various exchanges.

Cross-Listed Products

So not only do you need to choose your product and decide in many cases between electronic and open outcry, but for some markets, you also have to choose between different exchanges that offer nearly identical contracts. Metals are a prime example. If you want to trade gold futures, you have three choices. You can place your order in the COMEX pit-traded contract in New York, or the same COMEX contract electronically on CME's Globex platform. You can also choose the CBOT's gold contract traded electronically on e-cbot. The New York metals products are fungible between COMEX open-outcry and Globex venues, but e-cbot products are not with either. New York has been the primary market for both gold and silver for years, and continues to be even with CBOT's products gaining ground. When all else is equal, what I usually recommend is to choose the contract where the volume is best, because illiquid markets can make it more difficult for you to enter, exit, or manage your trades the way you'd like. Whenever in doubt, pull up volume figures from the various exchange Web sites for the products you want to trade, and take a look at patterns over several weeks. That usually will steer you in the right direction. I also recommend working with a professional to help you make sense of all these various factors, and make sure you are trading the right market, with the right order type, on the right exchange.

Michael Hinman is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. He can be reached at 866-471-2048 or via email at mhinman@lind-waldock.com.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2007 Lind-Waldock, a division of Man Financial Inc. All Rights Reserved.