BrokerTec eyeing bulk of Chicago futures trades
By Chris Sanders
NEW YORK, Dec 19 (Reuters) - BrokerTec Global LLC predicts within two years its just-opened futures exchange will attract most of the multibillion-dollar debt futures and options business now executed at two Chicago exchanges, a confidential company document obtained by Reuters says.
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If successful, in just two years BrokerTec will transplant a more than century-old business based on human interactions with computer screens and mouseclicks at a fraction of the current cost, upending one of the more staid and tradition-bound sectors of bond trading.
But grabbing market share in futures trading will be a difficult task with a wide array of players dedicated to systems and processes they've known for decades.
The document, an offering statement marked confidential for potential investors in the BrokerTec Futures Exchange's Class ``B'' shares, predicts that BrokerTec's cheaper trading fees and better technology will rob the cost-heavy Chicago Board of Trade and Chicago Mercantile Exchange of much of their business trading U.S. Treasury, Eurodollar and fed funds futures and options. The eurodollar futures contract, traded on the CME, is one of the most actively traded contracts in the world.
Although both the CBOT and CME offer electronic platforms, the majority of trading is still done in open outcry trading pits, where traders shout buy and sell orders at a dizzying pace for seven hours a day.
Yet BrokerTec, a New Jersey-based company that operates a successful cash electronic interdealer bond brokerage, said its cheaper system will win the day with fees that are, on average, about half of those charged by the CME and CBOT. It also said it will have a leg up because of the ability for traders to trade cash and futures on a single BrokerTec screen.
In what the prospectus calls the ``breakout scenario,'' BrokerTec projects it will have a 30 percent share of those markets in 12 months and a 70 percent share in 24 months.
Even if futures traders are reluctant to use the new system, BrokerTec anticipates in the ``slow scenario'' a 20 percent market share in 18 months and a 30 percent share in two years.
BrokerTec, which began trading Treasury futures Nov. 30, said it could not comment on the document.
David Prosperi, a spokesman for the Chicago Board of Trade, said: ``We've shown in the past that we've been able to meet and beat the competition.''
A spokeswoman for the Chicago Mercantile Exchange Inc. declined to comment, but did note that in November the exchange's clearing house cleared an average of 1.5 million Eurodollar futures and options contracts per day.
The CBOT's Prosperi added that total execution costs will remain lower at the 153-year-old exchange, in part, because locals, or independent traders, will ensure that buyers and sellers get a better contract price than BrokerTec can offer.
An official with one of the European banks backing BrokerTec's successful electronic interdealer brokerage, who requested anonymity, said he was convinced the new futures exchange will grow quickly because brokerage units of Wall Street and Europe's largest banks will save money on trading fees.
Already, most of the 14 banks that back BrokerTec's interdealer business have joined the futures exchange.
A total of 23 firms, including local Chicago futures trading shops, are BrokerTec futures members, with half a dozen more nearing completion of the application process, according to the future exchange's president, Hank Mlynarski.
In BrokerTec's short 18-month history of trading U.S. Treasury bonds between dealers in the cash market, volume has swelled to nearly 40 percent of the $160 billion trades daily in the interdealer market.
CHALLENGES AHEAD
BrokerTec understands that moving customers from fluidly traded markets to its upstart platform will be a tremendous challenge.
Bond broker Cantor Fitzgerald tried to offer electronic bond futures trading, but failed to build interest in the platform.
In its document, BrokerTec admits, ``it is extremely rare for two liquid futures markets in the same or similar contracts to coexist for any substantial period of time.''
Meanwhile, the Chicago Board of Trade is streamlining its operations and cutting member fees as it prepares itself for an increasingly competitive marketplace.
But BrokerTec, according to the document, is certain its low-cost venture into futures trading will be profitable.
If all goes according to plan, profits will start to flow sometime in 2003. By mid-2004, the company anticipates a $74 million profit on $115 million in revenue.
If traders are slow to use BrokerTec, the company's worst-case scenario predicts losses in 2001 and 2002 and a $21 million profit on $52 million in revenue in 2003. |
