CME Pushes to Boost Options Electronic Trading
Monday September 25, 5:27 pm ET
By Jesse Thomas, Dow Jones Newswires
CME Push to Boost Electronic Options Trading Bears Fruit
CHICAGO (AP) -- At the Chicago Mercantile Exchange, it has been some time since the trading pits for futures contracts have been as raucous as the options pits.
Options pit traders are part of a dying breed at CME, holding onto their past as they shout orders and use hand signals in the open-outcry trading arena. The bulk of futures trading has migrated to the computer screen in recent years, with trades executed at the click of a button.
However, trading of options contracts, long considered too complex to trade electronically, has started going through the same transition. It's an indication of the seemingly inexorable shift occurring as exchanges continually upgrade their technology and provide other incentives to draw more participants at a time of increasing competition. It's even possible that in a few years, the options pits at CME and its main rival, the Chicago Board of Trade, could become largely obsolete.
Michael Cohen, an independent Eurodollar options broker who has been in the pits for 20 years, says it's tough to replicate the floor trading conditions because options liquidity remains thin on the screen. Nonetheless, the shift is clearly underway.
"We really don't have control over it," Cohen said during a recent trading session. "It's a dying breed already."
Growth in electronic trading, which accounts for 70 percent of overall trading volume at CME, has played an important role in the overall growth of the exchange, boosting revenue and profits and contributing to big share price gains for Chicago Mercantile Exchange Holdings Inc.
CME shares ended Monday at $469.26, up 28 percent since the start of the year. The stock hit a record high of $508.84 in July and is up from $35 at the time of its initial public offering in December 2002.
In addition to allowing a broader range of customers to trade, electronic trading boosts revenue because CME collects a fee for all transactions done on the Globex electronic platform.
Eurodollar futures, used by investors to bet on the direction of interest rates, are the most actively traded contract at CME. Trading of options on Eurodollar futures has increased significantly over the past year as investors look for more ways to hedge their exposure to interest rate fluctuations as the Federal Reserve ends a two-year cycle of rate hikes.
Options, which are often used by traders as a risk management tool, give traders the right but not the obligation to buy or sell the contract.
In August, average daily trading volume for Eurodollar options was 1.2 million contracts, up 59 percent from a year earlier and representing about a quarter of overall volume at CME. Eurodollar options account for more than 90 percent of total options trading at CME.
About 12 percent of options trades at CME last month were executed electronically, up from 9.4 percent in the second quarter and 7.3 percent in the first quarter of this year.
"We're beginning to see our efforts pay off," said CME Chief Executive Officer Craig Donohue at a recent investment conference.
To accommodate the more complex options trading, CME has made several improvements to the Globex electronic platform, by increasing bandwidth, allowing for faster transaction times and data processing. The CME has said it will spend between $90 million and 100 million on capital expenditures this year, is largely devoted to improving technology and Globex.
Meanwhile, over the past year the exchange has implemented its enhanced options system on Globex, allowing complex trades that were typically only possible to execute on the trading floor. CME has also introduced a fee-incentive program for Eurodollar options designed to attract new customers to Globex.
Donohue has said that the steps that have been taken to promote electronic trading of options are similar to the ones that allowed for trading of Eurodollar futures to migrate to the screen several years ago. Almost 90 percent of futures volume has been conducted electronically at CME this year, up from about 53 percent in 2003 and just 18 percent in 2000.
Analysts see positive implications for CME's bottom line as this transition continues. Camron Ghaffari, an analyst at Morgan Stanley, said CME has the potential to double its revenue capture because of the extra fees the exchange collects from options that trade electronically rather than on the floor. Morgan Stanley has an investment banking relationship with CME.
When asked whether the options pits could eventually look like some of the futures pits now, meaning mostly empty, he said, "It's more a question of when, not if." |
