Oh what a year for the business! Record volumes, merged exchanges, consolidated futures commission merchants (FCM). Once again it proves, at least in this business for the most part, size matters.
In our yearly review of the brokerage business, Top 50 Brokers, Managing Editor Dan Collins does a thorough job recounting the issues FCMs have to deal with. Of course the merger of the Chicago Mercantile Exchange with the Chicago Board of Trade changes their models in many ways; sometimes for the good, sometimes for the bad. For the good, it should be a cost savings, merging desks, businesses and hopefully a way to capitalize on the business. In the bad ways, there is the fear the exchanges will increase fees, however, more importantly is the fear the exchanges will become even more of a competitor.
If nothing else, business is dynamic, and in this business if you don’t more forward, you die. Brokers learned long ago that moving on-line would help their business. They pushed the exchanges to go electronic, and electronic the exchanges went. The new world opened doors for traders around the world, and helped volumes grow. Brokers jumped on board with bigger, better, faster platforms and the ability to access exchanges. But something happened along the way: a new group developed, the so-called prop house. Perhaps not so new in reality: firms have been trading their own money for years, but new in the sense that these groups have the deep pockets to develop the newest “black box” software, and with direct access to the exchanges, the sky is the limit. This worries the FCMs, understandably, and will be the next move in laying down rules that a prop firm doesn’t hurt the exchanges, thus FCMs, in the long run.
But something to think about, with the subprime meltdown, some of the largest investment banks in the world: UBS, Citibank, Merrill Lynch, lost billions of dollars. And though it seemed to take a hit on their balance sheets (and their CEOs being shown the door), the day- to-day routine of the business continues to thrive. This is true also in the futures business. Some of the big losses in funds, most notably Amaranth that lost $6 billion, caused barely a blip on the radar. Refco’s demise was an asterisk. Enron’s demise, as one of the FCM leaders noted in this story, actually helped bring business to the exchange side. Thus, with every loss in this incredibly fast footed industry, there seems to be an uptick on the growth of the business. Deft firms move to onto the exchange, or move to larger clearing firms, or move to specialized firms, whatever the need is, the speed in handling change has seemed to work out for the industry over all.
One thing has emerged again: the talk about moving to a single regulator, that is merging the Securities and Exchange Commission (SEC) with the Commodity Futures Trading Commission (CFTC). When the Commodity Exchange Act was devised, its wisdom was understanding that the futures business was different than the securities business. The SEC is all about protecting the investor. But in the futures business, the CFTC’s mission is maintaining market integrity. That’s a big difference. Further, in the futures markets, stock futures (indexes, individual, options on futures) make up about 30% of the U.S. volume. Hardly enough to demand an SEC takeover. I’m always baffled when this argument comes up because it doesn’t make sense. The futures markets cover a diverse number of products, including bonds, commodities and some fringe products, such as climate futures. Where do these fit in an SEC world? And where does it show the SEC has done such a bang up job that it would be a good cop to the world of futures? Even Alan Greenspan, granted libertarian in his views, saw the beauty of the CFTC. This industry, even those FCMs who are regulated by both, should see it also.
On a final note, everyone at Futures Magazine Group wishes you a very happy holiday season and a healthy and profitable 2008.