Next-generation trading in futures markets: A comparison of open outcry and order matching systems

The introduction of new screen-based systems for trading securities and fut ures contracts has led to the emergence of a "market for markets," and exch anges, broker-dealer firms, and market data vendors are competing to offer trade execution services that will attract customers and trading volumes. T his competition is favored in the United States by regulatory bodies such a s the SEC and the CFTC, which have taken steps such as encouraging the list ing of equity options on multiple exchanges and approving the applications of screen-based systems for designation as contract markets. This paper exa mines the design of one screen-based futures market, the Canter Financial F utures Exchange (CX), and describes its capabilities relative to the rival, floor-based market in Chicago. In comparison to traditional open-outcry me chanisms, the CX order-matching system maintains strict first ill-first out time priority among submitted orders. Using a simple simulation model, we see that order matching leads to faster completion of desired trades and ab out a one-third reduction in transactions costs.