War For Futures Heats Up
euromoney.com
01/17/03
Antony Currie
The competition for trading platforms to attract liquidity in US futures has increased dramatically since the CBOT last week dumped the Eurex trading system in favour of Liffe Connect.
The CBOT and Eurex have been partners in a joint trading platform since mid-1999. But they will now be direct rivals from 2004, which is when Eurex hopes to launch a new US futures exchange, in reaction to its rejection by the CBOT.
Eurex's decision was hardly unexpected. The two exchanges resolved last July to restructure the terms of their alliance, shortening the time left on its joint trading platform by nine months to January 2004, and cutting four years off the original 2008 date of what is in effect a non-compete clause.
At a press conference announcing CBOT's move, Bernard Dan, the exchange's chief executive, indicated that he wanted to switch to a more fully-rounded technology platform. He said he and his executives were "pleased with Eurex, but as leaders we have an obligation to plan for the future. We felt strongly that business functionality in the areas of trading, flexible matching algorithms, products and market management had to be supported by a leading edge technical architecture." There might also be some concern that there was little point continuing an alliance with an exchange which in a year's time would also be allowed to compete directly with the CBOT.
It took more than a year for Eurex and the CBOT to strike their original agreement in 1998, after a series of postponements. The issue provided the chief battleground for the two main contenders in the December 1998 election for the chairmanship of the CBOT. The winner, soyabean trader David Brennan, was opposed to the alliance, but within months of taking office he found himself signing a pact between the two.
When the alliance was first struck Eurex was on the rise and open-outcry derivatives exchanges appeared to be heading for the history books. By early 1998 Eurex had wrested control of the liquidity of the benchmark Bund futures contract from Liffe, which at the time was still open outcry, and appeared to be poised to be one of several all-electronic platforms about to take on Chicago's dominance of the US futures business.
Instead Eurex found its way into the US market through cooperation, offering its electronic trading platform to the CBOT, which had yet to develop a decent platform of its own. The partnership was called a/c/e, which stands for Alliance CBOT-Eurex. According to Eurex, this platform now handles more than 70% of US bond futures trading. Assuming that it receives regulatory approval for a new US exchange, Eurex could provide a serious challenge to the dominance of both the CBOT and its local rival the Chicago Mercantile Exchange in dollar-based futures contracts.
In the CBOT's favour is the fact that there has been no serious threat as yet to its control of the liquidity pool for US bond futures. Cantor Fitzgerald set up a joint venture with the New York Cotton Exchange in 1998 called Cantor Futures, much to the very public anger of the CBOT. But it attracts very little flow. "It probably does around 10,000 contracts a year," says one market participant. "Brokertec killed it." Announced in 1999, New Jersey-based Brokertec Futures Exchange is owned by 14 banks and went live in late 2001, and in November hit a record of more than 33,000 contracts for the month. But that's still no challenge to the dominance of the CBOT. "Brokertec hasn't proved to be a competitor," said Dan. And he may hope to fend off the challenge from Eurex for similar reasons. He says: "It's difficult for an exchange that isn't local, let alone one from another country."
That might sound dangerously close to complacency, but Chicago's open-outcry exchanges have proved wrong many previous predictions of their impending demise. And the CBOT has another trick up its sleeve. A week before Christmas it announced that it had buried the hatchet with Cantor Fitzgerald. The two are working to list the CBOT's futures products on the same platform as eSpeed, which is Cantor's cash products platform. If this is successful, it will offer customers an easier route for much of their bond transactions. It could also help end-users to cut down on their costs by disintermediating the brokers. That might prod the big banks into putting more resources into their own platform, Brokertec.
It would appear that there's a battle brewing between Brokertec, the CBOT and Eurex. The newly public CME could also pitch in. For now, though, for the first time in more than five years, Chicago finally seems to have gained the upper hand.
© Copyright Institutional Investor, Inc. 2002 |
