Securities Week
April 11, 2005
EXCHANGE ANALYTICS PROVIDES NYBOT WITH CUSTOMIZED ETHICS TRAINING PROGRAM
While the Commodity Exchange Act requires members of futures exchanges to undergo ethics training, the responsibility for training usually falls on the participating firms or the members themselves, rather than the exchanges.
Nevertheless, the New York Board of Trade recently joined the New York Mercantile Exchange in engaging an outside firm, Exchange Analytics, to insure that its members get the training they need to meet their responsibilities to the public.
In NYBOT´s case, the training is specifically tailored to its members, who trade on the exchange floor. The training program, which is available via Internet from any computer, lays out hypothetical scenarios that include examples of actual dilemmas NYBOT traders might face.
"For NYBOT, we took actual floor examples and characters; a floor trader, a firm operations manager, and an attorney with a reading of the law," said Larry Israel, President of Exchange Analytics, a firm that provides ethics training to the futures industry and a longtime member of the Chicago Board of Trade.
"One thing the NYBOT wanted that was unique was, when you have an exchange floor with thousands of people, there are all sorts of things you must watch out for."
For example, as with any Fortune 500 company, sexual harassment is a sensitive topic. We designed a module that paints a common harassment scenario and asked, "Who do you go to? Who is responsible?" Israel said.
The training module uses the example of a female floor clerk who has to cross a certain desk every day on the floor where a group of male traders is huddled watching Internet pornography. This type of "hostile environment" is more common than the more obvious "quid-pro-quo" form of harassment, Israel said.
"There is a locker room mentality with a majority of male traders. In this case, once the management of the clerks knows about it, most people say the buck stops there, but it gets confusing when you have multiple clerks at different firms. A lot of these things can be handled informally as well as formally."
All the exchanges require members to take some type of sexual harassment course; The Exchange Analytics module fulfills that requirement, Israel said.
Another problem a trader could face involves financial temptation:
"Say a floor broker gets an order to sell 500 contracts. Some economic news is starting to cause the markets to break very rapidly. The broker sells 500 and gives the report to the customer, and an hour later someone comes up and says he bought another 100, and the broker remembers he did sell that order, he just messed up and lost his count. This happens all the time, especially on big numbers. So the customer is happy with his fill price."
"But now someone comes up and says he bought 100 contracts and the market is much lower, so the floor broker made a mistake. Under the rules of most exchanges, if an error is made on an oversell, the customer is entitled to the best fill price, but in practice no one might know about the error. So someone could say, ´Why don´t you just bust your trade and recognize the profit and split it with me and give me a check.´ Or the floor broker could say, ´You just keep the profit, but next time I have an error, look for me.´ Obviously that´s very illegal and unethical, but it´s very tempting in real life," Israel said.
NYBOT specifically asked that its traders be given realistic examples such as this one, he added.
Other ethical questions involve high-pressure sales tactics, customer suitability, and electronic communication.
"We really worked hard to create scenarios that are real-life and also tough to answer," Israel said. "Some people argue about whether ethics training does any good, because people are either ethical or not. But the idea is not so much to teach ethics as to practice ethics - to look at a real, true dilemma where there´s really not a right or wrong answer most of the time, but you see the ramifications of a decision."
Israel said the feedback on the training program has been positive so far. The biggest complaint has been a slow Internet connection.
"The grayer I can make these cases, the more true the [examples], the better received they are. Things can happen that are subject to interpretation. If people exercise their decision-making by practicing with dilemmas, I think they´ll be better served."