FM: How about the change in the customer make-up?
GC: At RJO we cover all of the space from the self-directed retail to the middle market to some [very] large hedging type customers, and we haven’t seen a change in the mix of the business. Hedgers need to hedge, middle market people need exposure to the markets and self-directed retail clients pretty much want active markets; we have had them in the grain markets this year so they are very active. We haven’t seen any type of real manifestation of customers leaving the marketplace as a result of MFG or PFG.
JG: The clients that left are the clients with specialties. If a guy was focused on trading the short end of the yield curve, a lot of those guys had to throw in the towel and retire. If a guy trades the Treasury products, the five-year vs. the 10-year, some of those guys threw in the towel because of some of the craziness that went on in those spreads over the last three or four years.
SS: Clients that love the futures market, love the futures market. And when they are trying to create or generate income there is not a better place to put it right now. If you know of any, let me know. The challenge they are having is with volatility levels coming down; it is much more difficult to make money so you have to be smart about where to take a trade. The challenge is not a change in demographics. What is causing the decline [in volume] among other things that were discussed earlier, is the decline in volatility.
FM: Are there any new asset classes or products that are emerging?
JG: The best move for the industry will occur if the euro (currency) falls apart because then you will go back to multiple sovereign currencies and multiple interest rate products in every country. Throughout the 1990s one of the really fun aspects of the marketplace was all the fixed-income convergence trades. You bought Italian bonds and sold German bonds and you had this very strong convergence play. If the euro does fall apart, as I think it will — it was a stupid idea and stupid ideas have a way of eventually not working out — then you are going to have 17 nations that both have their own currency and own fixed income markets, and futures to accompany those markets. That is going to be a fantastic era, I don’t think it will happen in the next few years but that is the next big opportunity and the CME’s establishment of a London entity is probably taking a long-term [look at] that potential opportunity.
SG: There is a dearth of new products. Whatever is out there now is a variation on a theme that is out there. Having said that, customers, [brokers], exchanges and regulators all have enough to do with the number of products we have.
TK: We benefited greatly from the demise of MF Global and taking on new customers, and part of that duty is to make sure they are being serviced properly and they are being managed properly and they are on board; it is not done overnight, it is a process that is still [happening] to this day. Other product [opportunities] are the fact that the Asian marketplace is opening up — we have offices there, there is a fair amount of interest in that area to trade U.S. exchanges and there is certainly a lot of money over there looking for righteous fills and perhaps a more modern recording system, and that is something that we are excited about and looking into.
PJ: OTC clearing is likely to drive further innovation in the futures space; we have the swaps contract. There hasn’t been a successful credit futures product and the market feels that there is room for that. A couple of other asset classes, real-estate and weather, feel like there could be significant demand materializing and going forward. OTC clearing, which is simply a result of our world having changed, that is usually where people are identifying opportunities.
FM: There has been a lack of volatility in equity and fixed income markets this year. Are there any sectors due to have a breakout?
SG: I am not an economist but I have been through enough cyclicality that when everyone is saying peace has broken out in the world or that volatility is going to remain low for an extended period of time — there is too much going on in the world from a geopolitical standpoint, from a macroeconomic standpoint — to say that the status quo will remain. I have no idea directionally what the markets are going to do but I am fairly certain within the next couple of months that there will be viable markets. I am fairly certain that the low volatility environment we are in now cannot last too long.
JG: Just to pile on and agree with Scott, look at the fixed income market. While the Fed is very happy to stand up and say short-term rates will stay where they are until the middle of 2015, that says nothing about where long-term rates will be. In 2013 the unexpected that could happen is number one, you could have significant job growth and number two, you could have significant wage inflation with that job growth. Anecdotally there is a lot of evidence out there that while the unemployment rate in aggregate is relatively high at 7.8%, the unemployment rate among college graduates is well under 5%. It is not at the 2.4% it was at before the economic downturn, but there is an arguably good chance that wage inflation picks up long before unemployment breaks 7% and with that all hell could break loose because then you might get a [very] steep yield curve. People might start selling bonds and selling [10-year notes]. You could have the five-year go from 76 basis points to 150 basis points in three or four months just based on the fact that people no longer view us as stuck in a zero [interest rate] environment. As Scott is saying, it is when everyone throws in the towel and says this is it, nothing can happen, that is when you are likely to get some unexpected things.