CBOT starts battle for market share
By Jeremy Grant
Published: January 13 2003 4:00 | Last Updated: January 13 2003 4:00
Astatue of Ceres, the Roman goddess of grain, has towered over the Chicago Board of Trade since the building was erected in 1930, symbolising the exchange's links with the rich agricultural traditions of the US Midwest.
But a more appropriate mythical figure for CBOT's headquarters would be Mars, the god of war.
Its decision last week to lease an electronic trading system from Euronext-Liffe, the London-based derivatives exchange, rather than accept an offer from Eurex, the German-Swiss exchange, has unleashed a fierce battle for market share in the US derivatives market.
Eurex wasted no time in announcing that it would set up its own US derivatives exchange, a project it had been working on for some months in case its talks with the CBOT were not successful.
Both moves have altered the competitive landscape, with Europe's two largest derivatives exchanges set to make their first significant inroads into the US markets.
And, while the adoption of Liffe-Connect, the Euronext-Liffe system, will help the 155-year-old CBOT further integrate its "open outcry" trading pits with electronic screen-based trading, it has been left nervously wondering whether this will be enough to guarantee its independence.
"We've opened the door and we're just going to have to see how things unfold over the next few years," says one senior CBOT source.
The CBOT decision appears to have been based on two factors. First, Liffe-Connect was perceived to be better able to handle complicated swap trades and the addition of new products.
Second, the terms of the Euronext-Liffe contract did not require the CBOT to share any trading fee reve nues, allowing the Chicago exchange to retain its cherished independence from any technology provider.
For the Europeans, the CBOT offered a gateway into the US futures markets, where European exchanges have so far made little headway due to US regulatory resistance and a lack of dollar-denominated products and distribution channels.
The CBOT's business is booming, with trading volumes up 32 per cent last year compared with 2001, as investors sought ways of offsetting stock market risk through bond, currency and stock exchange index futures.
Not only is the CBOT dominant in US Treasury bond futures contracts, it is also home to the 30-year US Treasury bond contract. The exchange stands to gain if the US government decides to resume borrowing.
There is also the prospect of being able to develop new products with the CBOT. Even more importantly, both could work on establishing the common clearing systems that allow customers to exploit arbitrage opportunities more easily. "If you think that we've got the short end of the euro [yield curve] and they've [the CBOT] got the long end of the dollar, from a capital efficiency point of view there are opportunities in clearing," says Hugh Freedberg, Euronext-Liffe chief executive.
However, Eurex, which is controlled by Deutsche Börse, is determined to take advantage of one significant freedom it now has to compete with the CBOT.
A relationship forged between the two sides in 1999 expires in January 2004, allowing Eurex to offer its clients US Treasury bond futures products for the first time - effectively breaking the CBOT's decades-long monopoly in such instruments.
Although it must now invest heavily in a start-up exchange, Eurex is widely respected as a formidable marketing machine.
Traders in Europe say they welcome news of Eurex's US plans.
"We already transact 45 per cent of our European business through Eurex, so it would be cost-effective to use the same system for US business," says Peter Green, chief operating officer at the Kyte Group, a derivatives trading company.
However, there are some doubts over Eurex's ability to draw trading in US bond futures away from the CBOT and some Chicago traders point to previous failed efforts by other competitors, such as Brokertec, the US exchange set up by market users.
Meanwhile, the CBOT's cross-town rival, the Chicago Mercantile Exchange, has been busy making improvements to its own electronic trading system and will today spell out its growth strategy in the wake of a successful initial public offering in December.
For the CBOT, competition has never been so intense. But, as Bernie Dan, chief executive, puts it: "Others who enter this space are going to have to deal with a Board of Trade that's going to be very aggressive." Additional reporting by Aline van Duyn in London |
