Electronic trade swamps Chicago exchanges' pits
Wed Aug 1, 2007 7:15 PM BST
By Christine Stebbins
CHICAGO, Aug 1 (Reuters) - Electronic trading is muscling its way into the U.S. futures industry, powering volumes, profits and alliances like last month's mega-merger between the Chicago Board of Trade and Chicago Mercantile Exchange.
Many long-time traders had been skeptical the $12 billion dollar deal, creating the world's largest derivatives market, would go through, but others saw the marriage as inevitable and driven by growing demand for screen-based trading.
"The electronification of markets has increased volume tremendously and will continue to do so," said Richard Sandor, chief executive of the Chicago Climate Exchange, an all-electronic marketplace started in November, 2003.
"It fits with a global world where people trade 24 hours a day," said Sandor, a pioneering veteran of financial futures. "It's opened up the business to much wider participation."
"The general switch to some form of electronic trading has been the single most significant driver of structural change," said global management consultant Accenture in a 2006 study.
"Screen trading" -- electronic matching of bids and offers that eliminates the industry's century-old stalwart, the pit broker -- appeared on the scene more than a decade ago among European markets following the London Stock Exchange's historic "Big Bang" switch to screen trade in October, 1986.
But U.S. exchanges lagged behind, clinging to decades-old traditions of "open outcry" of rowdy traders jostling in crowded auctions in octagonal "pits," a form born in the late 1800s at the Chicago Board of Trade and one that put the city at the top of the world futures industry for the next century.
CBOT traders, especially in the oldest, grain trading pits, resisted any switch -- or even sharing trades "side by side" with screens -- until recently.
It was just one year ago on Aug. 1 that Chicago grains were listed for electronic day-time trade. Over the past year, volume has grown and migrated to the screen with roughly 65 percent of the grains traded electronically, compared with less than 2 percent a year ago when they were available only for night-time e-trade.
In contrast, the CME was more accepting of electronic trade over the years, launching its blockbuster electronic system GLOBEX in 1992.
In 2000, GLOBEX trading volume had grown to 34.5 million contracts, up 114 percent from 1999. That was just a warm-up.
By 2006, GLOBEX volumes soared to 1.015 billion contracts, or equal to 72 percent of all contracts traded on the CME.
CBOT members over the years watched as the CME led them on screen trading, on selling shares to the public, and on going global. Four years ago, CBOT agreed to merge costly back-office trade clearing operations as customers demanded and technology afforded. So it was no surprise that the e-trading pioneer CME eventually absorbed its cross-town laggard.
SCREENS: THE WRITING ON THE WALL?
"By 2007, that issue was behind us," Leo Melamed, CME chairman emeritus and a driving force behind the CME/CBOT merger, told Reuters. "The CBOT members and leadership by then had embraced electronic trade no differently than the CME."
With the CBOT-CME merger, the new entity CME Group Inc(CME.N: Quote, Profile , Research) will account for more than 85 percent of all U.S. exchange-traded futures volume.
That leaves competitors like the New York Mercantile Exchange (NMX.N: Quote, Profile , Research) and the all-electronic Intercontinental Exchange (ICE.N: Quote, Profile , Research) -- the losing bidder for the CBOT -- an uphill climb.
But the CBOT-CME merger, despite its current daunting market share, passed anti-trust muster in part, analysts said, because of the continuing electronic evolution of markets and the vast need to hedge financial risks.
"Electronic trading has really been the impetus behind volume growth taking off over the last couple years," said Patrick O'Shaughnessy, an equities analyst at Morningstar Inc. in Chicago. "In the next five years you're still going to see volume growth around 15 percent. It's still going to be strong and certainly stronger than U.S. equities exchanges."
The battleground to watch, analysts said, is the "over-the-counter" market. Such risk-offset markets are now dominated by big banks who write one-to-one deals. The new CME Group aims to offer alternatives.
Currently, of all such "derivative" products, only 17 percent of trades are done on exchanges. The other 83 percent is done in the OTC market, according to Accenture research.
New products will also be a driver. A potentially vast market for tradable "credits" for greenhouse gas emissions is available at Sandor's climate exchange, a market that could see growth soar if the United States passes a law capping emissions and the country suddenly needs a "cap and trade" system.
"The bottom line is that I'm very bullish about the industry," Sandor said. "I think the world is a very volatile place and the role of hedging and price transparency...are critical roles that exchanges have and will continue."
Asked if his exchange, which is owned by Climate Exchange Plc (CLE.N: Quote, Profile , Research), has been approached by any others to discuss an alliance, Sandor said: "As a publicly traded company, our response is always: no comment." |
