The hustle and bustle on the floor of the New York Stock Exchange could disappear forever given the possibilities presented by electronic trading, and a US research initiative has been set up to discover how.
"It is now feasible to go in and create all kinds of new stock market trading options," said Prof James Marsden, head of the Department of Operations and Information Management in the School of Business at the University of Connecticut.
He and Dr Y Alex Tung of the University of Nevada, Las Vegas have created models of stock exchanges that employ electronic trading and have used them to develop new ways to combat insider trading.
Prof Marsden is also the executive director of the Treibeck Electronic Commerce Initiative. Funded by the Treibeck family foundation, the TECI was set up last September at the university and involves the work of nine researchers. "Our research is broadly aimed at investigating the potential of alternative markets," he stated. "With information technology we can have new markets and new methods."
It is not written anywhere that a stock market must look like New York or Dublin or London. Just as the Internet is changing the face of shopping and the way companies make themselves known, the Internet is in a position tgrow new exchange markets. ProMarsden believes that the Internet will provide the backbone for new types of markets. "I think that is where we are going."
The bottom line, he said, was that if the market could make traders money then it would succeed whatever its actual form. This in particular was what TECI was meant to do, examine what alternatives there might be and how they might operate.
"You can give the consumer a choice," Prof Marsden said. "You can put out two or three or four different kinds of markets throughout the day." Such a market or markets could operate on a 24-hour basis and would not be bound by geography.
"We can actually run prototype markets," he said, and can test how they operate by populating them with "traders" in the form of students. Information technology was already profoundly changing traditional markets, he said. The Dutch flower auction was very much structured as a hands-on market where buyers could see, touch and smell what was on offer from the sellers. Now much of the trade is electronic, he said, with a high level of trust built up between the two sides and close regulation to prevent fraud or misrepresentation.
The result is a market freed of its local confines. Buyers don't have to know the seller but they can still haggle. Other markets could operate this way too, including stock markets, Prof Marsden suggested.
"There are still lots of security issues" to be addressed, but there were always ways around this. One option was the use of a TTP, a "trusted third party" who could vouchsafe real sellers and real buyers.
Prof Marsden and Dr Tung have already used their computerised market models to test ways to control insider trading, which is but one aspect of the TECI brief. They recently wrote about their research in informs, the journal of the Institute for Operations Research and the Management Sciences.
"Regulation is very expensive and can be somewhat ineffective," Prof Marsden said. "With information technology we can actually structure markets."
They devised two anti-insider trading experiments which were run on their electronic market. The "traders" were made up of business, engineering and mathematics graduates, who were monitored as they traded securities. A package of useful insider information was made available to certain traders and the team tried to pick up on when a trader took advantage of this.
"We tried to look at different regulatory schemes" to remove the insider advantage, he explained. They devised an electronic monitoring system to watch what sorts of trades were being done and which automatically applied penalties for infringements, but a real market could not be monitored in this way.
"The question is how do you identify an insider," Prof Marsden asked. He described one case where the insider was a psychiatrist who was treating the wife of a company's chief executive. She talked about the company and the psychiatrist made use of the information.
The team then tried a different tack. "Instead of thinking about regulation, suppose we alter the operation of the market."
In this experiment, when insider trading was suspected, insider information was immediately made available to all other traders who could then act upon it. "We tried to simplify the market for them." This immediately eliminated the advantage and the insider was stymied.
Prof Marsden acknowledged that these types of experiments did not address difficulties in large stock exchanges such as New York or Hong Kong because they were so overwhelmingly complex.
Such devices could come into play however in new types of electronic markets, which could be designed to allow this type of computerised control, yet would be far less complex to operate.
