Software row could ratchet up trading costs
By Jeremy Grant in Chicago
Published: October 28 2004 22:25 | Last updated: October 28 2004 22:25
Futures traders face the prospect of a rise in costs as a result of action threatened by Trading Technologies, a rapidly-growing industry software vendor, against the world’s four largest futures exchanges.
The move has sent a chill through the futures industry, which is enjoying record trading volumes amid continued commodity, interest rate and currency price volatility.
It is also the first sign of a power struggle between the world’s largest derivatives exchanges and the technology providers that are increasingly crucial to those exchanges’ access to the global trading community.
Trading Technologies (TT) has approached the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) - the largest US futures exchanges - proposing that they pay a fee to TT of 2.5 cents per trade on all contracts traded at the exchanges.
Such a fee would amount to an annual cost to each exchange of about $100m, according to a senior executive at one of the exchanges. The CME’s revenues last year were $536m.
An approach to Eurex and Euronext-Liffe, Europe’s two big derivatives exchanges, could come shortly.
Harris Brumfield, TT’s chief executive, is proposing the charge because he believes exchanges should pay futures industry independent software vendors (ISVs) for distributing exchanges’ products to the world’s trading community.
TT is an example of a new breed of independent software vendors (ISVs) that have grown up alongside the rapid development of electronic futures trading.
Although the Chicago-based company was founded only a decade ago, it already has significant influence in the futures market because about half of global trading in US Treasury bond and note futures - among the most heavily traded futures - are traded through its software. That means it offers access to a large pool of traders.
ISVs typically elect to make connections to futures exchanges, altering their software to fit an exchange’s “gateway”.
However in August, the Montreal Exchange became the first example of the reverse process: an exchange choosing to make a connection to an ISV when it agreed to connect to TT’s X_Trader electronic order entry system.
One senior executive at a European derivatives exchange said: “We knew several years ago that if the ISV business grew into an oligopoly the screws could be turned against us.”
However one source close to TT said: “This is a negotiation, not a threat. The issue is who is going to pay for the use of the ISV system? Coca-Cola pays distributors to distribute its products. That’s the way distributors make money from producers. The futures industry has always worked the wrong way round.”
TT has indicated to the exchanges that it is in their interest to pay the 2.5 cent fee because he is also considering approaching scores of bank brokerages and other brokers in an attempt to levy a 10 cents per trade fee on them for trades done through his software.
Such a move would amount to a de facto tax on the futures industry and would immediately raise the cost of trading, dampen trading activity and cut crucial trading fee revenues at the exchanges.
“It’s about having a choke point on growth,” said one senior executive at the CME.
All four futures exchanges are enjoying record trading volume, largely because unprecedented competition has prompted them to make steep cuts in trading fees - and in some cause to waive fees completely.
Cynthia Zeltwanger, chief executive of Fimat USA, the brokerage unit of French bank Societe Generale, said: “These wonderful low fees that we’ve been talking about may not be so low any more. It’s very clear that with a reduction in fees the volume has gone up, it’s been very good for the industry. But any time there is a tax, it has an economic consequence.”
TT appears ready to back up its threat to take on the brokerage community by using a landmark patent, secured only two months ago, for X_Trader.
TT has alarmed rival ISVs and the futures industry by following up the award of the patent with patent infringement lawsuits against eSpeed, the bond trading arm of Cantor Fitzgerald, Chicago-based broker Goldenberg Hehmeyer and Kingstree Trading, also based in Chicago.
Although TT has since reached settlements with Goldenberg Hehmeyer and Kingstree, brokerages that have also developed - but not patented - their own in-house trading software fear they could become targets of litigation by Mr Brumfield.
Ms Zeltwanger said: “People are scrambling to work out what these settlements mean.”
Mr Brumfield held a meeting on Wednesday with board members of the US Futures Industry Association, which represents the interests of the futures trading businesses of Wall Street banks and other brokers.
He is understood to have explained his approach to the exchanges and what his proposals might mean for the brokerage community if the exchanges rejected him. The Chicago exchanges are understood to have given Mr Brumfield a lukewarm response to his proposal. They point out that TT’s X_Trader patent has not yet been tested in court.
But the senior executive at the European derivatives exchange said: “There’s going to be a little bit of a power struggle. It’s unprecedented.” |
