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CME & CBOE Sign Single Stock Futures Agreement



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***** This was a special report I wrote for my Industry News recipients 
today, based on my attending a press conference announcing this new joint 
venture among three Chicago exchanges.  I thought I would share it with the 
list.

On neutral ground, high up on the top of the Sears Tower in the Chicago Loop, 
leaders of the CME and the CBOE announced that their boards had just signed a 
letter of intent to form a new joint venture to electronically trade single 
stock futures.  The CBOT will also participate in the joint venture in a 
limited stake it was announced at the press conference I attended today.
 
The CBOE and CME will each have a 45% stake in the yet to be named separate 
exchange and the CBOT will own 10% in this for-profit entity.  The CBOE and 
CME are negotiating with the Options Clearing Corp, which clears all CBOE 
transactions, to clear the new products, the press release and exchange 
leaders said.  The new futures laws allow the OCC to clear both securities 
exchanges SSFs and futures exchanges SSFs.
 
This new exchange will be separate from the CBOE, CME and CBOT and have its 
own management and board.  The CBOT will have at least one representative on 
the board, though the size of the board was depicted as undermined, but 
probably small.
 
Single stock futures ("SSF") will be traded electronically on Globex2 and 
CBOE Direct.  The a/c/e partners, the CBOT and Eurex will discuss possible 
inclusion of the a/c/e platform in the new venture, according to David 
Vitale, the CBOT CEO who sat in the front row of press during the press 
conference.
 
My intuition tells me that the CBOT was a late addition to this joint 
venture.  I don't know if it was the fact the CBOT was not represented at the 
dais, the big CBOE-CME sign behind the dais, or the way the press release 
only mentions the CBOE and the CME at the end of it.  But something smacks of 
last minute change and there was much to gain in terms of good will and 
liquidity by adding the CBOT members to the new effort.
 
Certainly it would not sit well for the CBOT to be excluded from such a 
important new collaborative effort.  The rationale for the CBOT's small 
percentage could be made by simply looking at the percentages of the equity 
trading at the various exchanges, with the CBOT having the smallest equity 
volume.  And I am sure there are other reasons, specifically the tight CBOT 
balance sheet.  However, it does not matter in the long run.  The CBOT 
members will have equal access and opportunity to CBOE and CME members and it 
is the opportunity that is important.  
 
The agreement to form the joint venture does prevent all three exchanges from 
offering their own open outcry version of single stock futures.
 
CME Chairman Scott Gordon and CBOE President Bill Brodsky both said their 
exchanges polled their existing clients and asked what those clients would 
need to trade such an instrument.  The answer the clients gave was 
cooperation and collaboration among the Chicago exchanges was necessary to 
form the right combination of operational, margin efficiencies and deep 
liquidity pools to encourage them to use them.
 
Single stock futures offer new efficiencies to securities trading, securities 
lending and corporate hedging activities.  It is expected the new exchange 
will develop rules that would allow block trading and exchange for physicals 
('EFP").
 
None of the representatives from the CBOE and CME would comment on the 
specifics of any of the contracts.  Brodsky at another event I had attended 
where he spoke on single stock futures had noted the success of the MEFF 
exchange in Spain with physical delivery of the stocks versus the cash 
settled LIFFE Universal Security Futures.  Brodsky also noted that while 
Nasdaq had to go across the ocean to enter a multi-exchange SSF with LIFFE, 
the three Chicago exchanges did a deal "right here in Chicago."  If I had to 
guess, I would say the SSF would have a physical delivery, matching those of 
individual options.  Exchange Traded Funds, also part of the new law, were 
not mentioned at the press conference.
 
The new exchange will be able to trade any stock that is available to trade 
options on, according the Commodity Futures Modernization Act of 2000.  That 
means the joint venture could trade SSFs on both U.S. and International 
stocks.
 
This announcement today begins a new era of Chicago exchange cooperation and 
could lead to greater efficiencies being realized in the future.  It 
certainly bodes well for the tone of any CBOT/CBOE takes about the CBOT 
exercise rights.    
 
A clean slate and new exchange was the best way to avoid the expected fights 
from the various membership interests at the three exchanges.   A separate 
culture and funding and management is also a good move.
 
Jim McNulty, President of the CME, said there were no plans for any public 
offering in the new exchange at this time.  His answer was very direct and 
seemed to indicate to me that no IPO hype was going to be injected into this 
endeavor.
 
He also said SSF would offer a perfect hedge for equity options and that the 
capital efficiencies for SSF would be an advantage over OTC traded 
instruments, which are really just SSFs under different names.  Price 
transparency and the lack of stock lending and borrowing were also mentioned 
as efficiencies by McNulty.
 
CBOE traders will be able to access SSF on the trading floor with hand held 
computers, which will access the yet to be tried CBOE Direct.  CME floor 
traders will be able to access Globex2 from their Globex2 terminals.  
Certainly this will be a boon to the Independent Software Vendors like PATS 
Systems, Trading Technologies and others who offer multiple exchange 
electronic access while utilizing the latest exchange APIs.   
 
This was just about the best news for single stock futures potential success 
that I can imagine at this point.  A unified Chicago exchange community, 
working together, forming a new venture with separate management and board, 
that is a good start.  Certainly working together on a growing and successful 
new project could prompt exchange leadership and members to look for greater 
efficiencies in common clearing or even mergers.  First the CBOE and the CBOT 
need to be for profit to match the CME.  But that is a story for another day.
 
Regards,
 
John J. Lothian
 
The Price Futures Group, Inc.
Electronic Trading Division
www.pricegroupetd.com
Disclosure:  Futures and options trading involves substantial risk. Past 
performance is not necessarily indicative of future results.
 
Disclaimer: This letter is strictly the opinion of its writer and is intended 
solely for informative purposes and is not to be construed, under any 
circumstances, by implication or otherwise, as an offer to sell or a 
solicitation to buy or trade in any commodities or securities herein named. 
Information is obtained from sources believed to be reliable, but is in no 
way  guaranteed.  No guarantee
of any kind is implied or possible where projections of future conditions are 
attempted. 
 
Futures and options trading involves risk.  Past results are no indication of 
future performance.