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November 1, 2001

Electronic Calls Back in Spotlight: Will American Markets Remain the Exception?

By Brian O'Connell and Gregory Bresiger

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  • Electronic Calls Back in Spotlight: Will American Markets Remain the Exception?
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The persistent questions of the electronic call market: If you build it, will they ever come? And will they ever trade in sufficient volumes?

Electronic call markets, their advocates note, are highly popular in Europe in places such as the ParisBourse and DeutscheBourse.

Electronic call markets will reward those visionary market officials who are willing to take a chance, advocates predict.

Electronic call markets provide better execution prices than traditional dealer dominated markets, according to many friends and enemies of the concept. Electronic call markets, advocates insist, are the wave of the future.

"They are inevitable. They are simply more efficient," according to Benn Steil, who has studied markets as a fellow for the Council of Foreign Relations.

Electronic call markets, others say, will never work in the United States.

"The primary reason they will never make it here is because no one truly understands them," said John Wheeler, head trader for American Century.

An electronic call auction, unlike the continuous trading system for most U.S. equity transactions, is not, however exceedingly complex.

It batches buy and sell orders, then executes them at fixed points in time, at prices which most accurately balance supply and demand.

The executions could be at the opening and the closing of a session. Call markets can also be used as part of a continuous system, creating a hybrid.

An electronic call is a price-discovery mechanism and should not be confused with the electronic crossing services operated by Instinet and others. These use a reference price from the continuous market to match orders.

The pure electronic call is not popular in the U.S. One system, the Arizona Stock Exchange, has struggled to survive. A manual call opens trading at the New York and American stock exchanges. But the specialist does the work performed by a computer in an electronic call.

The debate over market structure has been renewed because of recent rocky markets, the disturbing events of Sept. 11, and the expectation that those volatile markets will continue in the near future.

Before the Sept. 11 attacks, for example, the estimated earnings of companies in the S&P 500 stock index were expected to decline by 10.2 percent this year and rise by 23.2 percent in 2002, according to First Call/Thomson Financial. (Thomson Financial is the parent of Thomson/IMG, publisher of Traders Magazine).

A week later, First Call/Thomson adjusted the numbers to a decline of 10.2 percent this year and an increase of 20 percent in S&P earnings in 2002. Either way, most observers agree: Volatile times appear to be in the market's immediate future.

Historical Roots

So why do electronic call markets elicit such controversy? And why do many market observers and participants, even as they praise the concept, say that electronic call markets will never make it in the U.S.?

"We also have very unique markets here. Our markets are bigger and very different than what they are in Europe," according to Wheeler.