The automated electronic exchange SOFFEX

traded against two simple orders or another combination. Liquidity is enhanced by matching simple orders against combination orders whenever possible. As long as prices are available in one contract and in the combination market, liquidity is automatically transmitted to all contracts. Although SOFFEX has implemented a subset of these combination functions, the implications of this functionality demonstrate a significant advantage of electronic trading over open outcry. With the right enhancements, SOFFEX could trade any possible combination of its contracts transparently. The ultimate expression of this idea is to have no pre-defined combinations, but rather to create them on demand. SOFFEX shows the first wave of the evolution towards fully-automated exchanges. Anonymous automatic matching with the computer as referee and the automatic synthesis of complex mul-ti-leg combinations are two of the most revolutionary applications of technology to financial markets. Partially or fully automated exchange systems are replacing open outcry trading. Although the application of technology in financial services has traditionally been restricted to reducing transaction costs and automating routine functions such as clearing and settlement, the potential exists to change completely the way trading occurs. This article describes aspects of the Swiss Options and Financial Futures Exchange (SOFFEX), the first fully automated electronic exchange. directly from workstations in their offices. Unlike open outcry systems, each trader is guaranteed the best price available at all times, regardless of the size or position of the trader. The large majority of trades at SOFFEX are anonymous. Although special functions exist to allow traders to list their identities with their orders, these block trades must occur inside the " inside market, " i.e., between the highest buy order or lowest sell order. SOFFEX has traded options contracts since 1988, and futures contracts since 1990. Options are based on Swiss blue chip stocks and the Swiss Market Index (SMI). Futures contracts are based upon European indices and short term interest rates. This article focuses on a subset of trading functions that best demonstrate the far-reaching potential of the electronic marketplace. These functions are automatic matching and combination/ synthetic matching. SOFFEX is a fully-automated derivative exchange where traders may buy or sell a variety of options and futures contracts possible for one incoming order to match against several " book " orders at different prices. One of the most interesting and advanced features of SOFFEX is its ability to match combinations of contracts against each other or …