EDITORIAL/OPINION

By: Louis B. Mendelsohn
President, Market Technologies

As the 1990s unfold, the world's financial markets are on the threshold of a technology-driven revolution. Until a few years ago, trading in stocks, stock indexes, futures and options was carried out in isolation within separate time zones on domestic exchanges. Now, the world's three major time zones -the Far East, Europe, and North America - are linked together by technology into one 24-hour global market.

When news of an unexpected increase in the U.S. trade deficit, a military incursion in the Middle East or a sudden, sharp drop in stock prices in Tokyo is beamed around the world, multinational corporations, professional money managers, individual investors and speculators react instantly. They seek the best risk-reward payoff by moving enormous amounts of capital from one continent to another, without regard to national allegiance, geographical boundaries, or time of day. Domestically, program traders enact stock-index arbitrage between the New York Stock Exchange and the Chicago Mercantile Exchange's Standard & Poor's 500 at the touch of a button.

Economic, political, or military events reverberate throughout the world's financial markets within minutes. Even an unfounded rumor can set off a chain reaction of responses with immediate worldwide repercussions. In today's electronic environment, time and space are transcended. A rout that may have taken days, weeks or even months to develop in an earlier, less technological age, now can unfold around the world in just a few minutes or perhaps seconds, even as we sleep.

The global market crash of 1987, the financial equivalent of a natural earthquake, underscores the interdependence of the stock and futures markets worldwide. With the imminent introduction of electronic 24-hour trading systems by various futures exchanges, and perhaps even by the New York Stock Exchange, financial aftershocks, more serious than that of October, 1989, may become commonplace in the 1990's, as the "Big One" looms over the financial horizon. Why has this high-stakes game of global 24-hour trading come about? And more importantly, where is it going?

Advancements in satellite telecommunications, the advent of computer-assisted program trading, 1992 unification of Europe, continued integration of the world's economies and financial markets, the shift toward professional money management, and the need by multinational corporations and institutional investors to manage currency, equity, and interest rate risk on a 24-hour basis have converged to bring about the emergence of global electronic trading.

This revolution will have profound and as yet unforeseen effects on both the financial markets and the world as a whole. Right now there are vital security, clearing and regulatory issues that must be resolved to assure the fiduciary integrity of the international financial and banking systems, particularly during times of worldwide financial or political crisis.

A global contingency plan needs to be implemented to cope with potential system malfunctions such as host or terminal failures, communications disruptions and even a system wide overload. Serious consideration needs to be given to system security to protect against possible acts of terrorism, isolated cases of sabotage and the more mundane problem of computer crime.

Central and international banks will need to develop a 24-hour system of payments and transfers. One possible solution would be to extend the hours of operation of the central banks for the purpose of inter-bank payments, and to allow settlement in designated currencies several times within the 24-hour trading cycle.

Regulatory agencies worldwide will need to develop greater technical expertise to perform their oversight functions effectively and will need to establish a standardized framework to handle the regulatory requirements of global trading.

The integrity of the world financial and banking systems necessitates that international coordination and cooperation among the various stock and futures exchanges, central banks, finance ministries, regulatory agencies and international banks be implemented through formal agreements and informal understandings. To date, last minute, frantic telephone discussions during a crisis has been the modus operandi.

If these issues are confronted head on, the global electronic markets of the 1990s should function efficiently without heightening the prospect of a major global earthquake on the financial Richter scale. The shock absorbers and circuit breakers recently implemented between the New York Stock Exchange and the Chicago futures exchanges, as well as efforts to curb program trading during periods of adverse market volatility are big steps in the right direction.

Now it's time to extend these efforts internationally to build a solid foundation for the world's financial markets to function effectively during the next decade and into the 21st century.

 

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