The Exchange Exchange:
The battle of the exchanges continues as the Swiss-German Eurex US continues to taunt Chicago's behemoth exchanges with the promise of efficient, low-cost electronic trading of US Treasury futures and other products currently cornered by the Chicago Board of Trade and Chicago Mercantile Exchange. Wednesday the euro-zone competitor signed a software deal with Trading Technologies, a well established, Chicago based software vendor.
The CBOT and CME, lifelong adversaries, have realized nothing unites like a common enemy. In this case, with Eurex US's application pending approval by the Commodity Futures Trading Commission, the trading Mecca's were forced to take off the gloves and make nice.
Strange Exchange Bedfellows
First move, get the Eurex application off of the CFTC's "fast-track" 60-day approval schedule, pushing the Eurex planned Feb 1, '04 launch date off the radar: Done. Next, with 180 days of breathing space, ignore a pro-Eurex letter from Federal Reserve Chairman/market gremlin Alan Greenspan, praising the competitive spirit: Done. When The Clearing Corp, which handled the CBOT's substantial clearing business, began flirting with Eurex, the result was the (some might say unholy) CBOT/CME alliance: Done. Now, time to start the cost savings.
The cross-town rivals began combining clearing operations through the Common Clearing Link the last week in November. The cooperation, freeing up an estimated $1.6 billion in margins and other costs, will be the beginning of what will likely end in spiraling cost cutting for traders.
As the clearing situation was getting up and running, the CBOT simultaneously began transitioning from its a/c/e electronic platform (designed by Eurex) to Liffe Connect. The CBOT, a notoriously set-in-its-ways dinosaur, has been surprisingly quick to respond now that the spunkier Merc is its dance partner.
The "Efficient, Economically-Attractive" Exchange
The challenge of Eurex, which, by nature has considerably less overhead than the floor operations, will be in finding innovative ways to cut costs, and keep them down, while not sacrificing the liquidity, execution and trust that keeps traders coming back.
The TT deal will offer incentives to traders with a gateway to Eurex and toys like TT's "Autospreader," which allows spread trading between exchanges and "is key, absolutely key, as the biggest volume will likely come through arbitrage between the same products on the different exchanges [specifically in interest rate instruments]," offered a person close to the deal. TT software is estimated to handle almost half the derivatives traded on the four largest exchanges.
TT "is the largest screen out there, they have a lot of eyeballs. Bond traders will want the arbitrage opportunities, and they will present themselves, initially. But in the end, the more efficient, economically-attractive [exchange] will win," says one trading lifer. "Eurex, is just one of many things in the works, like everywhere, we are seeing a consolidation in the industry."
While one East Coast bond slinger, with the blind devotion of the born again, says he is "not convinced yet that floor operations are going to zero. There are 87 electronic ways to do business ; plenty of us still want to just pick up a phone. Get a person, get our business done." |
