From the February 01, 2008 issue of Futures Magazine • Subscribe!

Financial heavyweights challenge CME

With the CME Group consolidating power through its recent purchase of the Chicago Board of Trade, the big brokerage houses, who are its largest customers, got together once again to try to compete with the Chicago monolith. In December a consortium of 12 financial institutions announced plans to launch a new electronic futures exchange in 2008.

The group has many of the usual suspects: Bank of America, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, JPMorgan, Merrill Lynch, and the Royal Bank of Scotland; it also has a few new and intriguing names: hedge fund Citadel, capital market technology provider eSpeed, and trading firms Getco and Peak 6.

“With only two major players in the U.S. futures exchange space, it is only logical that a new entrant should emerge,” says Kevin McPartland, senior analyst at Tabb Group.

In reaction to the announcement, CME Group touted its position as a low-cost provider of trading services. “We continue to place high priority on maintaining our global leadership position as the low cost provider of trading opportunities for liquidity providers, market makers and high volume customers,” a CME spokesperson said.

In what is perhaps a sign that CME Group is taking the challenge seriously, on Jan. 9 it announced plans to reduce the minimum tick size for the 30-year U.S. Treasury bond futures contract and both the five-year U.S. Treasury note futures and options on futures in the first quarter of 2008. CME also will begin allowing block trading, subject to CFTC approval, for certain CBOT interest rate products. Treasury futures are expected to be the first product launched by the new exchange. According to its spokesperson, the new exchange “is also looking at Eurodollars, and they’re not ruling anything out” in terms of product offerings.

Paul Saltzman, COO of eSpeed, was named acting CEO of the exchange, but stepped down from both eSpeed and the new exchange on Jan. 10. The new exchange, which has not yet picked a headquarters, will be starting the CFTC approval process “very quickly” according to a spokesperson.

There have been several attempts to wrestle the volume from the CBOT Treasury complex, the most recent in 2004 when Eurex launched Eurex US, which now operates as the U.S. Futures Exchange under majority owner Man Group.

McPartland believes that the new exchange could succeed where others failed due in part to the boom in electronic trading. “The level of electronic futures trading in 2008 compared to where it was when BrokerTec launched [its futures exchange] is dramatically different,” he says.

Experts agree that liquidity will be one of the keys to the new exchange’s success and the liquidity lies at the CME and will likely stay there.

Lower fees and solid technology are important as well, says Jeff Shaw, head of market making at Timber Hill. “The most important thing is to get liquidity quickly. It is tight and liquid markets that will give an alternative to CME a chance,” he adds.

What the new exchange will most likely do — whether it is necessary or not — is prevent the CME from pressing its pricing power advantage, which may be what it is designed to do.

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