FM: Why don’t you think the volume was impacted?
Tom Kadlec: If you take the FX volume, [those firms] were not big players in the FX market and our FX volume was off materially. Energies the same way. We are a commercial ag company; our volume is pretty good in that space. Why? Because we had a drought year. I’m sure there is some volume effect, but it is one of a number of things. If we had an interest rate yield, I am sure Joe Guinan’s business in the interest rate sector would be much [better]. I go back to customer confidence. I spend 25% of my time talking about our process to customers, to brokers, reassuring them that we have a wholesome product, that we are a firm that doesn’t proprietary trade, that has integrity in terms of our process. That is up materially; we spend more time doing that than anything else, and hopefully as an industry collectively with the exchanges and the regulators we can restore that confidence. That will affect volume.
Joe Guinan: Some of the decrease in volume is tied to MF Global. You can’t handicap it. I don’t think it is huge, maybe 10%, and some of the decline in volume [because of] MF Global is because some players have left the futures market. Some other players, maybe prop shops — especially European prop shops — don’t have a lot of money back and with reduced capital they have less ability to trade. To Gerry’s point about the regulatory reaction — I would call it overreach — there has been some villain hunting going on ever since the economic downturn post-Lehman in the fall of ’08. At a macro level, society is still trying to find the guys who caused the great recession; the financial institutions, Wall Street, whoever it was, there is still a search to find a and punish those people. From that perspective MF Global happened at a bad time, and it doesn’t help our industry at all when it appears that someone like a Jon Corzine might escape this unscathed. That doesn’t help the industry because just like Dostoyevsky’s “Crime and Punishment,” people like to think that there will be justice in the end. It is a stain on the industry if we emerge from this without the public feeling like there was appropriate punishment.
Some of the volume drop-off was caused by MF Global, but to Tom’s point, interest rates have been a huge source of volume, especially in Chicago. The short-term interest rate products have been a huge volume contributor historically and for the past few years they’re a declining percent. That is the big thing that is hurting us. That is fueled by some of the post-recession [rules] such as Dodd-Frank, which is tremendously inhibiting big banks’ ability to trade.
Peter Johnson: It is always tempting to make linear connections between certain bad or unfortunate events and subsequent results, which in this case sounds like it is decreased volumes. To Joe’s point, I don’t think we can forget about the European sovereign debt crisis and OTC clearing [work] that has been going on for two-and-a-half years and has been costly and time-consuming. In addition to what Joe said about banks paring back their trading, they might be shutting down their prop trading activities or moving them into their asset managers. It has been a huge distraction just in terms of the infrastructure build to get ready for everything that is coming. Deadlines are now approaching and this is complicated new stuff for everybody. It is not just the buy side — it is the sell side, it is exchanges, it is vendors and so this is a very big infrastructure build. Increasing cost — in terms of the new regulatory requirements that we need to adhere to, but also with zero interest rates and all the uncertainty of the markets — is reducing profit opportunities. MF Global and Peregrine have contributed to a lot of other things that are ultimately changing the pricing model of the futures industry, which is something that we all are going to have to address.
SG: On the regulatory front [there are] some different perspectives. One is you have the post 2008 financial crisis, Dodd-Frank: What is the regulatory [reform] going to look like? And then you have MF Global and PFG coming to light. Then, third, what do the regulators do with respect to [high-frequency trading], changes in market structure and all those things? It is a really complicated picture, and it is not clear yet what the outcome is going to be.
PJ: On a positive note, that complexity Scott refers to, in addition to the cost and uncertainty, is going to be a good thing for futures volume. It is going to be expensive, it is an infrastructure build and futures are known, they’re easy and they’re liquid. The CME recently announced the launch of a swap futures contract; you have the Eris Exchange and all of a sudden you are seeing a lot of alternatives to OTC clearing, which are going to be more appealing than they had been in the past because of the cost and complexity of all this stuff.
SS: On top of that you are not going to get any help from interest rates any time soon. So you are searching for yield. You have to go somewhere for yield. So it is only a matter of time before people start trading whatever products are available so they can get some yield on capital.
PJ: Again, given the nature of OTC clearing, as it takes hold some clients are going to be looking to hedge their various exposures with listed products, futures instead of the new costly products.