Markets on the move; Chicago a destination
Computerized foreign exchanges are making a direct assault on city's trading dominance and traditions, making change inevitable
By David Greising
Tribune chief business correspondent
Published February 24, 2004
LONDON -- Markets move Nick Harrison. Or, more precisely, Harrison moves for markets.
He started as a London stock trader in the early 1980s and moved to Chicago's futures pits after the 1987 market crash. He later returned home to the London International Financial Futures and Options Exchange.
Then, after a competitive attack in 1998 by the all-electronic Swiss-German Eurex exchange made the LIFFE trading floor obsolete, Harrison moved to a small office near the daunting limestone cliffs of Gibraltar.
"I was dead set against the trading screen," he says. But today, he trades in as many as six different markets at a time. Harrison even has multiple alarm clocks to remind him when the French are about to announce their producer price index, or when the Bank of England might make a move on interest rates.
Harrison's odyssey could be instructive now that Chicago's role as a global financial center is on the line. For the first time, computerized foreign exchanges are making direct competitive assaults on Chicago.
Eurex US launched trading Feb. 8 in trading in U.S. Treasury futures, the Chicago Board of Trade's hallmark products. And next month, the LIFFE itself will launch trading in the Chicago Mercantile Exchange's biggest contract, Eurodollars.
Foreign competition likely will speed Chicago's transition to computerized trading. This will change the way thousands of people in Chicago live and work--and alter the very fabric of downtown Chicago itself.
Ready to compete
The Chicago exchanges are better prepared for competition than the LIFFE was five years ago. But the one-two punch--automation and competition--seems likely to exact a toll.
Traders in The City, London's financial district, know firsthand how quickly big changes can happen. Computerized progress has turned some of London's financial landmarks into historical relics.
The LIFFE's cavernous former trading floor now is used mainly by diners from the building's fast-food canteen. The LIFFE's prior address, London's historic Royal Exchange building, is now a high-end shopping mall.
But technology isn't always a grim reaper for old markets. The former Royal Agricultural Hall on the outskirts of London, a train-station-size area where live cattle and sheep once traded, now is home to a high-tech trading arcade owned by The Kyte Group Ltd.
At Kyte, more than 150 people sit shoulder to shoulder. From banks of computers, they buy and sell contracts on everything from European interest rates to foreign currencies.
One trading room is filled with ex-LIFFE floor traders. And it's mostly quiet--the silence broken only by the clacking of computer keystrokes. Kyte's chief operating officer, Peter Green, likes it that way.
"If it's quiet in here, it's because the market is active," said Green. "It only gets noisy in here when the market is slow."
Before computerized trading, an operation like Kyte could not have existed. Ten miles from The City was a world away.
In precomputer days, when 3,000 traders, clerks and staff jammed the LIFFE floor, traders elbowed and fought over inches in the trading pits.
"The first and overarching concern in open outcry is physical space--how many customers you can get to in 10 strides. Because if it's more than that, you're too late," said Mark Aarons, director of City of London Options Ltd.
Big lifestyle changes made
Computers have changed the way people trade, too.
Traders can take positions in many commodities at a time. This has produced an unexpected benefit: Volume at the LIFFE has climbed substantially since the floor closed.
There is no clear need for traders to go downtown. Yet hundreds still do.
"These guys could all happily do their stuff at home," said Aarons, surveying the handful of traders in London Options' office. A computerized voice calls out whenever a trade is made.
"Why do they come to The City?" Aarons asks. "It's more energizing and possibly more profitable. Maybe they trade better here."
But traders have scattered, too. Trading desks are dotted throughout Europe and in more than 25 countries around the world.
Harrison, the former LIFFE floor trader, is one of a handful who moved to Gibraltar for the balmy weather and an income tax rate of around 6 percent.
He had feared computers would help big banks and brokerage houses freeze out small traders like him. But the opposite has happened. "The futures markets, if anything, have become fairer," Harrison said.
The far-flung customer base has given LIFFE a second chance at success. When Eurex launched its attack on the LIFFE's biggest contract, futures on the German government bonds, the LIFFE's open outcry pits died out, and the exchange nearly died too. But after dumping costly London real estate, cutting staff, and taking write-offs of $130 million, LIFFE righted itself.
Now, as a subsidiary of Amsterdam-based Euronext NV, LIFFE is both a Chicago competitor and vendor to Chicago. The exchange's LIFFE Connect trading system will be the Chicago Board of Trade's electronic backbone as it fights Eurex. Meanwhile, LIFFE will be attacking the Merc with a new Eurodollar contract.
Most futures experts give the Chicago exchanges good odds. Although many traders consider the Merc's electronic system to be weak, the CBOT's LIFFE Connect system is considered stronger than Eurex's.
Besides, notes Harrison, Chicago has one advantage. "The traders in Chicago are the finest in the world," Harrison said. "That won't change."
EXCHANGES
Chicago girds for battle, aided by `human capital'
Chicago's futures exchanges have gotten serious about threats from abroad.
The biggest change: A merger of the Merc and CBOT clearing operations that could free up $1.6 billion in trading capital. The exchanges also are cutting fees by as much as 65 percent to compete with the lower costs of Europe's all-electronic exchanges.
Bernard Dan, Chicago Board of Trade president, said Chicago learned a lesson from the London International Financial Futures and Options Exchange, which nearly went out of business after a competitive attack by the all-electronic Eurex. The LIFFE "didn't actively prepare for the battle they faced. We have," Dan said.
The most likely casualty: Chicago's open-outcry style of pit trading. Before long, open outcry will exist only in agricultural futures such as soybeans and corn, where computers don't yet compete, experts here say.
But Chicago still is enough of a center of gravity that market professionals are investing here.
Richard Sandor, architect of the Board of Trade's original interest rate futures in the 1970s, opened a new all-electronic exchange last year. The Chicago Climate Exchange offers trading on credits companies earn for surpassing federal emission standards.
"There may not be floor trading in the future," Sandor says. "But there is a huge pool of human capital here that has everything to do with success."
-- David Greising
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