New exchange to challenge Merc, CBOT
Financial-services giants see potential in futures trading
By Joshua Boak and Greg Burns, Tribune staff reporters Tribune staff reporter Becky Yerak contributed to this report
December 22, 2007
A dozen financial-services giants, including local hedge fund Citadel Investment Group, unveiled plans late Friday to launch an electronic futures exchange meant to challenge the dominance of Chicago's markets.
The Chicago Mercantile Exchange and the Chicago Board of Trade, which recently merged to form the CME Group, have reaped substantial profits trading futures contracts on everything from stock indexes to soybeans. The new venture aims to eat into that business while providing competition that could keep fees and other trading costs in check, sources said.
The firms backing the rival exchange represent some of the biggest names in global finance, all of which actively trade on the CME and the CBOT. They include Barclays Capital Inc., Citigroup Inc., Credit Suisse Group, Deutsche Bank Securities Inc., JPMorgan Chase & Co., Merrill Lynch & Co. and the Royal Bank of Scotland Group. Chicago-based members include trading firms Getco Ltd. and Peak6, and Citadel, the massive hedge fund run by billionaire Ken Griffin.
The as-yet-unnamed exchange intends to market U.S. Treasury futures as its first product next year.
Bill McBride, a spokesman for the new exchange, said the time is ripe for the launch, in part because of the substantial growth potential. "Of course the market is growing very rapidly," he said. "All of these players see a business opportunity."
The move to electronic trading in recent years has broken down international barriers, transforming exchanges once rooted in cities into a fast-growing, global business. Computerization also ended the need for trading pits, allowing new exchanges to emerge and old competitors to join forces. Now 12 prominent customers have decided to create their own venture.
A board of directors for the new enterprise expects to conduct an organizational meeting in early 2008, select a chairman, hire executives and identify a name and brand for the business, McBride said. No arrangements for trade clearing have been formalized, he noted, nor has a headquarters city been chosen.
New York-based eSpeed will provide the exchange's electronic trading system. Paul Saltzman, eSpeed's chief operating officer, will serve as acting chief executive as the exchange conducts a search process for its top management positions.
Creating a sizable challenger to the Merc and CBOT became an issue after the two first announced merger plans in October 2006. IntercontinentalExchange Inc. made a surprise competing bid for the CBOT months later, and some banks were said to back a CBOT-ICE combination to keep more control of their trading business. The Merc ended up outlasting ICE and won the CBOT for $11.8 billion, closing on the deal in July.
Patrick Arbor, a Chicago trading firm executive and former chairman of the CBOT, said the new venture is a legitimate threat.
"You have to take it very seriously," he said. "The breadth of the participants in this new exchange is impressive. They are big clients and big customers."
Making inroads on the CME Group's business will be difficult, as reflected in separate previous efforts to target Chicago futures exchanges by Cantor Fitzgerald and Germany-based Eurex with BrokerTec.
"Others have certainly tried. But we've got the liquidity, the platforms and the brand name," Arbor said. "I have confidence the management team of the exchange will enact the right measures."
Cantor Fitzgerald spun off the proposed exchange's platform provider, eSpeed, in 1999. Previous attempts did not feature the same cadre of backers in terms of scale, scope and market reach as the one announced Friday.
The CME Group late Friday welcomed the challenge: "We expect to continue to innovate, broaden our reach and provide our customers with leading edge risk management products," it said in a statement.
Shares of CME Group closed Friday at $710.95, up 1.4 percent, but fell by almost 3 percent, to $690, in after-hours trading. |
