Price Group Seminar with the CBOT on Launch of Electronically Traded Full-Sized Gold and Silver Contracts

Seminar held in October of 2006, introducing new electronically traded gold and silver futures at the CBOT
Introduction by: Bernard Dan, CEO of the CBOT
Speech by John J. Lothian, President of the Electronic Trading Division of The Price Futures Group, Inc.

Thank you Bernie for the kind introduction.

Before I get into trouble, let me start with a disclosure: The opinions I will be expressing are strictly those of John Lothian and not necessarily of The Price Futures Group, Inc. or its management.

On behalf of The Price Futures Group and the Chicago Board of Trade, I welcome you to today’s seminar featuring the CBOT’s new full-sized gold and silver contracts. It is my pleasure to speak to you today about a subject that I write often about: marketplace competition. I also want to talk to you about economic freedom, but more on that later.

The introduction of electronically traded full-sized gold and silver contracts on eCBOT opens a new competitive chapter in what publisher Patrick Young coined as the Capital Markets Revolution. While our experience in the United States up until this last year has been more of an evolution rather than a revolution, I can assure you that we are now fully in Mr. Young’s Capital Markets Revolution.

The Chicago Board of Trade is challenging not only the NYMEX for their gold and silver futures contracts, and ultimately the accompanying options contracts, but they are also challenging conventional wisdom and marketplace paradigms.

The oft repeated conventional wisdom I have heard from the Ag trading floor at the CBOT and other venues says physical commodity futures are not liquid enough when traded electronically. I am here to tell you this conventional wisdom will be proven wrong. Many physical commodity futures contracts will trade even larger volumes electronically than they do now in the trading pit. The disproving of this conventional wisdom, when the CBOT electronic full-sized gold and silver contracts are acclaimed as successful will have revolutionary repercussions on the progression of other physical commodity futures markets towards electronic trading.

Another tenet of conventional wisdom is that Eurex’s moving the Bund contract from the floor traded LIFFE to the electronically traded Eurex was a one-off event that will not be duplicated. It is difficult to move contracts from one exchange to another, but it is not impossible, and I believe the CBOT’s new contracts WILL represent a second significant chapter in the book about contracts that have moved.

Gold and silver have no national allegiances as did the German Bund contract. They are eternal commodities with historic value and universal appeal. They are the glue that has bound currencies, generations and civilizations together around the world for over 2 thousand years.

Gold and silver are poster boys of free markets and are the original vessels for financial risk management. Actually, it was one early derivation of gold futures in New York from which the term “runner” was coined in referring to the young boys hired as messengers to deliver the gold certificates that represented the contracts. Runners were harder to catch and rob of the certificates than slower footed messengers.

In the history of gold it has been traded at the New York Stock Exchange in the Gold Room, beginning in January of 1862, for next day delivery. Orders that could not be filled at the NYSE could be taken to a place called the Coal Hole at 23 William Street, according to the book “Wheels of Fortune” by Charles Geisst. The Coal Hole market later moved to Gilpin’s News Room, which was closed by Abraham Lincoln’s Treasury Secretary Salmon Chase with the passage of a new law. When Congress passed the Gold Bill in 1864 outlawing delayed deliveries of gold, Gilpin’s News Room closed and the “market moved to trader’s offices and street corners.”

Futures have changed greatly since those times. And today, the greater transparency, surety and flexibility offered by the CBOT’s electronic gold and silver markets will spur new volume, participants and trading strategies. These markets are poised for growth.

There is pent up demand for electronic trading for gold and silver from two important contingents. The first is from retail traders for whom the level of service out of the open outcry pits is insufficient. Some of these traders are inactive; some have been chased away by lousy service or bad fills, or some by the very lack of surety and timeliness of open outcry trading.

The other group for who there is pent up demand is from the proprietary trader community. Proprietary traders are seeking new inefficient markets to trade, and gold and silver offer them text book examples of inefficient markets operating under an outdated market model.

You could also say there is also pent up demand for innovation in gold and silver trading and the CBOT’s product offerings have the earmarks of satisfying that innovation need.

Only now is NYMEX instituting an exchange solution to deliver orders electronically and paperless to pit, or ring, as it is called in New York. The Chicago markets have had such technology in place for going on 10 years and the CBOT is about to move to a new generation electronic pit trading solution with project Denali. To me, NYMEX seems ill-prepared and out of position to fend off a challenge to their gold and silver market franchise. The history of exchange competition suggests the best way to defeat a challenge to an open outcry market from even a modest electronic trading challenger is to at least offer side by side electronic trading. If the challenge is more real and direct, then better technology and leadership is required to migrate the existing market to the screen to fend off the challenge. The history in Chicago, with the CBOT versus Cantor or Brokertec or Eurex, and at the CME with the Euronext.liffe Eurodollar challenge supports this point.

Back to gold and silver markets, the combination of retail and proprietary traders and the pent up demand for innovation has the potential to create the initial critical mass of liquidity that can attract the larger market participants. Many of today’s biggest players are biased towards the anonymity offered by electronic trading and will be ready participants in the CBOT’s new contracts as soon as their liquidity metrics will allow. Firms seeking to simplify their order book management will be attracted to the CBOT’s electronic market for its single trading venue and order book across trading days and time zones. Place the order just once and don’t worry about having to move it from open outcry to the electronic market and back at the beginning and end of the day.

Today’s global electronic trader, many of them a cross between what is considered traditional retail and the new proprietary trader, would never consider trading an open outcry market. Much of the world has been turned on to the value of electronic trading over open outcry, and like moving from a dial up Internet connection to a T-1 connection at work or cable at home, you never want to go back. These electronic market centric traders are a pool of new participants who are not currently participating, or at best under-participating in existing open outcry markets.

Because of gold and silver’s universal appeal beyond the borders of any nation, electronically traded gold and silver at the CBOT could offer a truly 24 hour market as the focus of trading shifted from market center to market center.

A 24 hour, or 21 hour in this case, liquid electronic market, could bring in new ways to play the metals markets as well. Hedge funds, CTAs and other professional money managers may well prefer developing and growing physical commodity trading and investment strategies around a more transparent, more accessible and more efficient electronic gold and silver market.

There has never been the level of interest in and respect for physical commodities as a trading vehicle or investment class in my 25 years in the markets as there is today. Let me repeat this, because I think this is a key factor. There has never been the level of interest in and respect for physical commodities as a trading vehicle or investment class in my 25 years in the markets as there is today.

With crude oil prices at historical levels and even the equity side of the investment community focusing on commodity prices, this is the right time to launch broader electronic gold and silver trading. The CBOT is launching this at the right time, with the right highly respected and widely distributed technology in eCBOT/Liffe Connect.

There are many lessons learned already about the key differences between open auction trading and electronic trading and those lessons offer some insights into how and why electronic trading will win the day in the metals markets.

Transparency is a major benefit of electronic trading and plays out in two ways. First, electronic market participants inside the pit and out in the wide wide world get to see the order book of buys and sells. In the pit, a trader may be able to assess the volume on the bid and/or offer, but electronic trading offers a much easier way to aggregate all the orders at, above and below the market. And anyone with an Internet connection can see this market breadth. And they can see it for free on

Secondly, the speed of electronic trading broadcasts the market movement much more quickly than the pit. We can expect to see gold and silver market movements first on eCBOT as time progresses. Just look at a time and sales on any CBOT electronic Treasury futures market and the side by side open auction market and you will see a dynamic difference in the number of bids, offers and trades broadcast for the electronic market.

The emini S&P was the prime example of this, both because of the outside market participation and the smaller tick size than the pit traded larger contract. The emini S&P became a lead indicator for assessing the direction and strength of the broad market. The CBOT’s gold and silver could also achieve such a leading indicator status due to the instantaneous reporting of fills versus the more labor intensive reporting from the trading floor.

Thirdly, electronic trading offers surety on several different levels. Today’s electronic traders are used to cancel replacing their orders without any friction from human intervention. The electronic price injection models used by many proprietary traders, so widely used in other electronic markets, move orders in and out of the order book so fast they would make the best floor clerk’s head spin.

Today’s multi-exchange electronic trading platforms allow traders of any level to quickly and without human friction enter and manage their orders and receive their fills. When the emini S&P started trading in 1997 on Globex, the match engine reportedly could execute 30 transactions per second. Today’s gateways to the exchange electronic trading match engines can handle as many as 100 messages per second. Exchange’s multiple match engines can handle upwards of 1000 trades per second across all its markets and the integrated match engine hardware. The electronic market, besides offering a fairer, flatter playing field, offers increased capacity for more traders to participate. That capacity represents room to grow.

Back in the 1980s when I was at a discount brokerage firm, when things got busy in New York and the floor staff could not handle the order flow, the phone clerks would stop answering the phones. Or, if they could not stand the sound of the phones anymore, they would pick the phone up and hang it up. It was not very pretty. With electronic trading, a world wired with T-1 lines, cable connections and DSL lines, the line to and from the market is always open and accessible for trading.

And with tools like those available from some ISVs to dynamically trade spreads and multiple markets all at the same time, the order entry capabilities and capacities for the electronic markets hold the promise of the larger gold and silver volumes to come.

Despite the strong opinions I have offered, I am not here to represent electronic trading against open auction markets. I am here to represent competition. No one knows for sure how this competition will play out, but the competitive pressures should bring us more choice and better service. And as a participant in the markets, that is all I could ask for. As the late former University of Chicago economist and Nobel Prize winner FA Hayek wrote: “Human reason can neither predict nor deliberately shape its own future. Its advances consist in finding out where it has been wrong.”

If I have any question about whether I am wrong or not, I just ask my wife and the answer is always yes.

Before I committed to doing this seminar I wanted to talk to NYMEX’s new CEO, Jim Newsome. Jim is the former Chairman of the CFTC and is a stalwart for free markets and competition in the marketplace. I told Chairman Newsome I was thinking of doing this seminar and wanted him to know that despite the fact I was promoting the CBOT’s new gold and silver contracts, it was nothing against NYMEX. In fact, I told him that this competition would be good for NYMEX and would help make it stronger, and he agreed. I fully expect NYMEX to respond to this competitive challenge, but don’t know what form it will take or if it will be successful. We shall have to be surprised.

Competition in the marketplace is an essential element to the futures industry’s history of innovation. If the industry is to survive and prosper, it must continue to have the necessary competitive tensions to create that innovation.

Let me end by talking about another thing that FA Hayek wrote. He said that “economic freedom is a necessary condition to freedom in general.” Let me say that again, “economic freedom is a necessary condition to freedom in general.” He said a system of free markets facilitates the existence of a free people. Hayek made a compelling case that without economic freedom, political and individual freedoms cannot possibly exist.

I would argue to you that electronic trading on a personal level represents a higher degree of economic freedom to a greater number of people than do our traditional open outcry markets. Open outcry futures markets have played a great role in history towards promoting greater economic freedom. Let no one question the tremendous role they have played in promoting economic freedom and general freedom around the world. I believe electronic trading can help us go even farther in advancing economic freedom.

1998 Nobel Prize winner, economist Amartya Sen recently wrote this in a commentary titled “An insight into the purpose of prosperity,” in the Financial Times about Hayek’s classic book, “The Road to Serfdom.”


“Consider Hayek’s insistence that any institution, including the market, be judged by the extent to which it promotes human liberty and freedom. This is different from the more common praise of the market as a promoter of economic prosperity. A huge part of economic theory is concerned with the prosperity argument, going back to Adam Smith and David Ricardo. That connection is indeed important, and it is not surprising that so much attention has been devoted to seeing the market mechanism from this perspective – defending its achievements as well as disputing particular claims and proposing qualified endorsements. Yet Hayek was surely right to insist on clarity regarding the purpose of seeking prosperity. Markets have to be judged, he argued, by their role in advancing freedoms, not just in generating more income (as Hayek once said: making money can be of interest only to the miser). This integrative perspective demands that we be concerned both with the outcome of market processes (including the economic prosperity it may generate and the extent to which that would advance human freedom) and with the processes through which these results are brought about (including the liberty of action that people have in an institutional system).”


This new product introduction is about something greater than just open outcry versus electronic trading or New York versus Chicago. It is about battling for advancement in economic freedom to a greater number of people. It is about the power of competition to create innovation. And it is about promoting greater general freedom around the world.

Thank you.

At this time, I would like to turn the seminar over to the CBOT staff and Jeff Campbell.

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