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I can imagine a complete new generation of futures spread trading
based on single-stock to index futures, same-sector contracts, and
sector vs sector contracts.
Where will the CME's new profits come from? Higher exchange
fees to the trader? Same exchange fees but higher anticipated volume?
Cutting out middlemen? Are my commissions and fees soon to increase,
decrease, or be doled out to someone else?
dbs
I4Lothian@xxxxxxx wrote:
> A combination of good management and exchange unity at the CME and
> lagging care taker management and a multitude of problems at the CBOT
> opens the door for a for-profit CME to take advantage of a weakened CBOT
> and become the dominant U.S. futures exchange.
>
> The CME is on a fast track to become a for-profit futures exchange. The
> membership has approved the plan, the CFTC has approved the minor
> technical rule changes and the CME just awaits a ruling from the
> Internal Revenue Service before being able to proceed with the plan.
>
> The CBOT on the other hand took the initial step to become a for-profit
> corporation with the goal of splitting the exchange in two around two
> different business models; open outcry trading and electronic trading.
> However, the CBOT faces several other daunting challenges.
>
> First is the question of CBOE Exercise Rights of Full CBOT members. The
> CBOT has filed a lawsuit “a lawsuit seeking a declaration that the
> CBOT’s re-incorporation as a Delaware not-for-profit corporation would
> not extinguish the Exercise Right and asking the Court to prevent the
> Chicago Board Options Exchange from taking any action to the contrary.”
> This could just be the first step in a very messy and lengthy court
> battle delaying the CBOT’s restructuring plan. Looking back in history,
> the CBOT legal battles with Dow Jones, Inc. over use of its Industrial
> Index for a futures contract back in the early 1980s opened the door for
> the CME to establish the dominant U.S. stock index market with the
> introduction of the lesser-known S&P 500.
>
> The CBOT has a big debt load from the building of the huge financial
> trading floor. The CBOT is also experiencing declining revenues and
> declining volume. The CBOT has gone from the busiest futures exchange
> in the world to the third busiest in Chicago. Throw in the fact that
> the CBOT does not own the CBOT Clearing Corp, which clears its trades,
> as opposed to the internal CME clearing operations, and you have a
> vulnerable exchange, IMHO.
>
> The CME has a new visionary and technology friendly CEO in place,
> selected to run a for-profit CME. The CBOT has an able, but care taking
> CEO in place, replacing the longtime politico CEO Thomas Donovan.
>
> An aggressive for-profit CME could chose to list traditional CBOT
> contracts on its popular Globex2 system to compete with the CBOT’s
> introduction of electronic versions of its contracts on the CBOT/Eurex
> alliance trading platform. The public may just choose the CME’s proven
> Globex2 platform and known support system versus the CBOT’s Eurex
> platform and unproven customer support. Throw in probable free quotes
> from the CME for these new electronic contracts and you may have a good
> start for the CME to win the electronic trading volume of the CBOT
> products.
>
> Mini contracts traded on CME have proven to be a key ingredient to the
> ongoing success of the exchange and its open outcry markets. The
> Globex2 stock index volume acts as a very dependable local trader where
> the pit traders and the arbitrageurs know they can lay off some of their
> risk, without the paper fumbling inefficiency of dealing with a broker
> burdened with the one lot cancel replace business.
>
> This is a real threat to the CBOT’s future. Two common themes of large
> brokerage firms and trading houses have always been implementing cost
> reducing electronic trading and common clearing of trades. The CME and
> CBOT have never been able to agree on common clearing despite the
> efforts of some very smart and influential exchange players to push it
> through. One way to accomplish common clearing is to promote the
> movement of trade to one exchange. These long time proponents of
> electronic trading and common clearing may be able to kill both birds
> with one stone.
>
> The CBOT’s hopes lie in being able to dispense with the Exercise Rights
> question with the CBOE and quickly wrap up merger negotiations with that
> same CBOE. A combined CBOT/CBOE would be a formidable opponent for the
> CME over the next battlefield; single stock futures. A lot of things
> have to fall in place, but a combined CBOT/CBOE would be able to
> leverage off of the liquidity and expertise offered by CBOT members
> trading on the CBOE and the growing volume and popularity of the CBOE
> stock option and indices products.
>
> The ability of a combined CBOT/CBOE to clear and margin securities and
> futures in a single exchange doing each already has some synergy which
> could give the CBOT/CBOE an edge in the battle for single stock futures
> volume. But don’t count the CME out. Their edge in electronic stock
> trading and likely head start as a for-profit futures exchange may give
> them the flexibility and resources to respond forcefully. I would look
> for them to pursue the Chicago Stock Exchange, perhaps?
>
> CME seat prices have recovered to the point IOM seats set new highs this
> spring. CBOT seat prices are off their lows, but still in the dumps,
> with the Full Seats deriving a large amount of their value from the
> Exercise Rights to trade on the CBOE trading floor.
>
> The CBOT is not dead yet, but it is bleeding red ink and vulnerable. An
> aggressive for-profit CME, smelling the blood in the water, might just
> decide to attempt to take a bite out of the CBOT’s market share. The
> CME may just make the CBOT’s electronic markets their lunch.
>
> Regards,
>
> John J. Lothian
>
> Disclosure: Futures trading involves financial risk, lots of it!
>
> Disclosure: John J. Lothian is the President of the Electronic Trading
> Division of The Price Futures Group, Inc., an Introducing Broker.
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