My office has a view looking across the Chicago river at the CME Group building, and I can see the top part of the tower, with Ceres above, of the Chicago Board of Trade (CBOT). Though most trading has gone electronic, it’s always comforting to see the buildings and know, especially now, that they both continue to brim with activity...either trading wise or plotting their future.
That these two great exchanges and former competitors could meld together with few glitches is one of their greatest accomplishments. The move of the CME floor over to the CBOT has proceeded well, and should be complete by the end of May. Further, the CBOT electronic products’ move to Globex went smoothly, according to users. Now with the CBOT gold contract “sold” to NYSE-Euronext, the CME Group is unencumbered and looking to bring the New York Mercantile Exchange (Nymex) into the fold. If that is approved by Nymex members and regulators, the CME Group would capture about 98% of the futures trading business in the United States, and about 42% of futures trading globally. Although always a player in the global scene, the new CME Group, even without Nymex, is a major factor in the financial markets, but with Nymex, it pretty much would account for all futures trading in the United States. As the United States trades the most derivatives in the world, that is no small feat. (See “No more second city,” by Associate Editor Chris McMahon.)
Now that the dust has settled from the merger — aside from some Department of Justice (DoJ) hiccups and an options exchange permit lawsuit — the CME Group needs to keep moving, something akin to a shark in, well, shark-infested waters. At a panel at the Futures Industry Association meeting in Florida last March, a major topic addressed was the clearing model of the global exchanges. Why clearing has moved to the front seat of discussion is due to a comment from the DoJ recently that, in essence, said a single silo clearing structure was detrimental to competition. This caused the CME Group’s (and most other exchanges’) share price to swoon and it still hasn’t regained its previous levels. Further, the main detractors of the “single silo” clearing mechanism are the investment banks of the world, who believe the huge exchange, by owning its clearing house, will arbitrarily hike fees. This has concerned them for years, but now they launched the Electronic Liquidity Exchange (ELX), which will use the eSpeed platform, to fight back.
The real problem may be the investment banks’ shortsightedness. As every exchange representative on that Florida panel agreed, the single silo method was the best, mainly because of new product development. Richard Sandor, chairman of the Chicago Climate Exchange and developer of a few important futures products, such as interest rates, noted that separating the clearing house from the exchange “can stop you from innovating.” He said, “I used to believe we could outsource (clearing)...but how naive to assume that the provider won’t become a competitor.” That’s a key reason Liffe is restructuring its clearing arrangement with the London Clearing House — so it would have more control over launching new products. Nymex’s Jim Newsome said, “The clearing house helps with new product formation because it can be faster to bring the product to market.” Andreus Preuss of Eurex added that “the key of having a clearing house is not the cost of clearing but the lost opportunity cost by [products] taking too long to get to market.”
So here’s the thing: for the CME Group to continue to thrive, it must stay relevant in an ever-changing world, as do all global exchanges. That means feeding the roots that made it great in the first place: new and useful products. They have to be brought to market regularly — and fast.
