From the September 01, 2006 issue of Futures Magazine • Subscribe!

Virtual landscape

When the Chicago Board Options Exchange announced in late July that it was holding a press conference the next day, we were very curious because this definitely was something out of the ordinary. And its announcement proved equally interesting: CBOE, now that it had launched its own futures exchange, was going to launch with several partners, mainly market making members, its own securities exchange. The logic makes sense: CBOE members have a natural order flow to the various stock exchanges. If they can capture that within a single exchange, costs could go down across the board. So simple, it’s a wonder it wasn’t thought of sooner.

Of course, it most likely was thought of sooner, but not really possible until today’s regulatory environment. With the flattening of the world both business and regulatory wise, global exchanges are striking out to compete not only in their backyard, but their competitor’s too. If that happens to be in another country, or in another market, well, so be it. The world may be flattening, but in context of the markets, where they exist and who regulates them, it’s multi-dimensional.

In our Trendlines section, we get into the details of CBOE’s move (“CBOE takes on New York”), and cover the New York Stock Exchange’s (NYSE) move to merge with Euronext,” the European derivatives exchange, in “The courtships of Euronext.” Although the latter is a story that’s been told before, this is from the eyes of Jean François Théodore, Euronext CEO, who spoke with our French correspondent. It is the back story of how the negotiations started and how it became a European conflagration, with the Deutsche Börse entering a bidding war and even French President Jacques Chirac putting in his two francs on the matter. And though these two stories were covered separately, they are related. After all, no doubt what prompted the CBOE to make its move was the decision by the NYSE to expand into the vibrant derivatives business in a big way. CBOE Chairman Bill Brodsky, who has run securities and futures exchanges, knows a thing or two about all those markets and is well positioned to have them under one roof.

And the “roof” is the interesting aspect of exchanges because in today’s world, where even the grains and softs markets have gone or are going electronic, an “exchange” really could be anywhere. For example: the InterContinental Exchange, ICE, is based in Atlanta, Ga., however, it owns the old International Petroleum Exchange (now ICE Futures), which resides in London. Where exactly is the exchange, and does it matter?

Editor-at-large Steve Zwick took this question on in his piece “Where is an exchange?” outlining the events that occurred at a hearing held in June by the Commodity Futures Trading Commission (CFTC) in discussing some of the contentious issues that have arisen from this cyber frontier. It discusses regulatory arbitrage, and how some countries use it against others who have stricter rules in trying to garner business. It also addresses the long-time complaints by U.S.-based exchanges and companies who believe they are stymied by the United States’ heavier hand when it comes to regulation. Sarbanes-Oxley always is complained about, perhaps rightly so, but isn’t transparency a key goal of regulators, and doesn’t it make a market stronger?

Regulators have a tricky job in trying to make sure market participants are protected, and market players have room to grow. The CFTC and other global regulators have had to think globally for years. Now it’s time to think four-dimensionally.

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