E-trading in an e-pit

It is not commonly known that the world of financial trading received a
major boost in 1988, when yours truly, failed a Forex trading
examination in London. You cannot really be a trader unless you eat,
drink and sleep money. I eat, drink and sleep technology. This disparity
in world views manifested itselfin my Forex trading examination result
and the rest is history.

I did spend some happy and formative years working on software
development in the financial futures sector and had the great pleasure
of visiting the trading floor of the Chicago Board of Trade in the late
Eighties.

The Chicago Board of Trade operates what is known as an 'Open Outcry'[1]
trading system in which buyers and sellers gather in a trading pit (an
octagonal hole in the ground basically) and shout at each other. The
shouting is supplemented with hand signals to communicate the two
critical trading sentences: "I want to buy at X" and "I want to sell at
Y".

If you are standing close to one of these trading pits when there is a
lot going on, the noise and activity is overwhelming. I was present for
the last 15 minutes of trading in the US Bond market one day and I don't
think I have ever seen a better example of organized chaos in my life.

When talking about e-business, I like to use open outcry trading pits as
an example of how value exchange is fundamentally a question of value
exchange preceeded by the exchange of bid/offer messages. In the case of
pit trading, these messages are sometimes verbal, sometimes visual but
the equation is the same. It goes like this:

A small number of well defined message types PLUS
a large number of buyers/sellers EQUALS
one financial market.

These days of course, more and more attention is being paid to how this
equation is best realized in a digital world. Proponents of the physical
manifestation of Open Outcry point out that the all important concept of
'market sentiment' does not translate easily into ones and zeros.
Financial institutions pay a lot of money to be able to literally *hear*
the buzz on the trading floor, to gauge the flow of action to factor in
trade volumes into their calculations and so on.

Proponents of purely digital trading point out the many advantages of a
digital approach in terms of trading volume, numbers of participants
speed of execution and so on.

As ever, there is truth on both sides. What interests me (proof, if ever
it was needed, that I am not cut out to be a trader) is the minimum
amount of technology needed to create an electronic alternative to an
Open Outcry system.

Let's split the problem into pieces. First, we need a way of getting
large numbers of buyers and sellers into the same digital space. Ok,
that is called the Internet/Intranet/Extranet. That was easy. Next, we
need a way in which groups of traders can form electronic 'pits' trading
a given commodity.

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