The CME will offer customer firms the opportunity to connect their co-located trading servers to the CME through high-speed fiber optic connections before year-end. These redundant server connections are expected to decrease network latency times for order entry to CME Globex to less than one millisecond. The new connection option is called CME Local Network (CME LNet).
“This will not cut out the FCM; the customer firms will still have to go through a clearing firm,” says a spokesperson for the CME. She says position traders and funds will be the most likely to use this connection.
While this may place the CME and its member firms in competition for services, it does not threaten disintermediation of FCMs. Most customers are not interested in joining every exchange, so they still need the FCM, says John Damgard, FIA president. “The big customers want to be able to access markets all over the world, not just the CME,” he says, adding that FCMs are the backbone of the industry because they distribute the products for the exchanges.
“Enhanced connectivity to Globex does not eliminate the need for an FCM,” says Mike Manning, CEO of Rand Financial Services. “As it relates to disintermediation, on a local level — and by that I mean the CME and the CBOT — they have been offering direct access to large clients for three or four years now. So we do have clients that no longer do their execution through us — they go directly to the exchange and then the exchange sends us hose trades for clearing. So we still have a relationship with the customer, we just no longer provide the execution [for those customers]” Manning says.
He says while a firm then pays more money to the exchange for that service, it may also pay less to an FCM because it’s using fewer services from the FCM. “In most cases it’s not the savings that’s driving the client, it’s the speed,” he says, adding, “The FCMs are still needed for the clearing and the exchanges don’t want in any way shape or form that piece of it.”
