Making the electronic leap

FREE TO GOOD HOME: One telephone, black, push-button, cordless. Active commodity trader no longer needs. Inquire at net-trader@electrading.com.

Might such ads pepper the classifieds soon? Futures brokers would like to think so. Online order entry saves them time and money, but if a Web browser is to replace the telephone, real benefits will have to trickle down to traders. Early promises certainly imply as much. These include faster fills, fewer order mistakes (on both the broker and client ends) and smaller costs.

"I very much like the simplicity and speed of having an order queued up and ready to go, and just hitting the 'do it' button for instant execution when the moment is right," says Gary Fritz, an S&P 500 day-trader in Fort Collins, Colo. "Plus, when I'm in a frenetic trading state, I'd really rather not deal with humans."

The biggest drawback of online order entry is reliability, says Fritz, who has temporarily stopped entering orders online for this reason.

"At least with a voice-placed order, you know there's a human on the other end who's received and acknowledged your order," he says "You know you can hold his feet to the fire if he screws up.... With [electronic order entry] there are too many links in the chain that can break."

Frederick Braden, an E-Mini day-trader in Houston, is satisfied with online order entry. Braden, who has been trading for about four years, just started entering orders online with NetFutures about three months ago.

"When I place a limit order close to the market, it generally takes three to five seconds to fill," Braden says. "I don't think I've ever waited over a minute."

Online order entry generally works like this: When you enter an order via the firm's online order entry interface (typically a modified Web page), the order is routed to a broker who then re-enters the order into a Tops terminal. The order then is routed through Tops to, for example, a printer on the exchange floor where a clerk hands it to a pit broker who executes it.

But there is no standard yet, as these steps vary widely among brokers. One firm that does things differently is Timber Hill, a New York-based firm. (Its brokerage arm is Interactive Brokers.) The Timber Hill system bypasses Tops completely. Orders are routed directly from the firm's order-entry interface to the company's hand-held devices in a pit.

While numerous brokers may offer online order entry, the technology that ties into exchange order-routing systems must be developed by the clearing FCMs. So while dozens of introducing brokers may offer online order entry with varying rates and ancillary features, a third of those may use the same underlying system (LeoWeb from LFG, for example). Also, some lBs might clear through several FCMs and offer as many options for an order-entry interface.

Despite the varying systems, some common aspects prevail.

Vincent G. Nolan., chief executive of brokerage CFOS Inc. in Houston, says one is that electronic order entry is not necessarily faster. Nolan's firm clears through about six FCMs and provides three online order entry interfaces to customers.

"Sure, there may be a 3.5 to 4.5 second sweep time [the time for the order to reach a floor terminal or printer], but the trade still has to go through the queuing sequence, be printed out - assuming the printer is plugged in, filled with paper and not on fire - read by a pit broker, filled and transmitted back," Nolan says.

But Nolan insists the industry has made great strides in electronic order entry the few years over which it has emerged. Still, only position traders should use it in its current state, he says. Except for the E-Mini, for which online orders enjoy an electronic tie-in to Globex, Nolan says fills still aren't consistent enough and the infrastructure is not solid enough for day-trading.

Paul Horvath, sales manager with Infinity Brokerage, says online trading is ready for day-traders in any market. As far as who should trade online, Horvath says experience counts. "Online trading is best for seasoned traders," he says. "Novice traders should not try online trading just yet. They still need a broker to help with order types, market information, etc."

The other area that should concern would-be electronic traders is the Y2K issue. Nolan says problems have cropped up with electronically entered orders for contracts expiring after Jan. 1, 2000. He says all traders should discuss contingency plans with their brokers and follow up electronically placed orders for such contracts with a phone call.

The table (left) lists a number of brokers that offer online order entry. While care was taken to be comprehensive, some firms did not respond to our requests for information.

The commission key in the table is based on discount commissions only for online trade entry. What a firm charges for full service could be many times higher. Also, the more frequently you trade, the more likely your broker will give you a break on commissions. Any discount will be a factor of many things that can't be reflected here, including your account size, your broker's need for your business and your negotiating skills.