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'Scuse me if this sounds naive, but why can't American exchanges do what
their European counterparts (well, at least LIFFE and Eurex) have already
done and say: "All right, from date X the trading floor will be abolished,
electronic trading only, like it or lump it."
So the locals weren't happy. Tough. The users were. That's
capitalism. Why doesn't it work that way across the pond ?
Regards,
Stefan Schulz
At 12:58 25/03/02 -0500, I4Lothian@xxxxxxx wrote:
>The CBOT is stepping up to borrow a page from the CME playbook with the
>introduction of the $5 electronically traded Dow contract, while the CME has
>is writing new chapters with plans to have all its contracts trade
>electronically in one form or another by the end of this year. However, the
>CBOT is throwing a bone to the traders and brokers in the Dow pit by
>canceling the side by side trading of the $10 Dow contract and trying to put
>the genie back in the bottle by eliminating the electronically traded $10 Dow
>during open outcry hours.
>
>How is that for mixing too many metaphors in a lead?
>
>The introduction of the $5 Dow contract provides the CBOT the cover to
>discontinue the side-by-side $10 Dow trading and only offer the $10 contract
>via open outcry from 7:20 AM to 3:15 PM every business day. This will be a
>shot in the arm for the open outcry trading pit trading the $10 Dow and give
>the public a choice of a $5 Dow electronically or a $10 Dow in the pit. One
>(trading the $5 Dow on a/c/e) offers greater price transparency, but also
>greater fees for comparable contract values. The other offers you greater
>fee efficiency for a larger contract size, but traded in the pit.
>
>The CBOT would seemly be hoping to create the type of synergy that the CME
>has between the S&P 500 pit-traded contract and the smaller Globex traded
>emini S&P contract with this new market structure. They announced a market
>maker program for the $5 Dow contract and some arbitrage program between the
>pit and electronic traded contracts to help jump-start that synergistic
>relationship.
>
>When the $2 Dow contract was launched I wrote it was too small and the CBOT
>should have offered a $5 contract instead. While I am glad to see them
>launch the $5 contract, I must admit that I was wrong about the $2 contract.
>I like its size and have found use for it in my dealings with customers. It
>is ideal for scaling into and out of positions and putting a position on in a
>high-risk environment when you want to be able to give the contract more room
>to swing.
>
>One interesting element of the $2 contract is that because of its more modest
>size, it is has more utility for a larger group of traders and investors.
>While futures trading is not appropriate for all people, the $2 Dow contract
>is appropriate for a much larger group of potential traders and investors
>than many of their higher dollar indices cousins. The $2 Dow has legitimate
>hedging use for many stock market investors, both on the short and the long
>side.
>
>Given the interest in trading indices that we have seen, the menu of Dow
>contracts that the CBOT will be offering starting April 5 should offer broad
>appeal to the indices traders and those migrating to indices from trading
>individual shares. And this should be a boost to Single Stock Futures
>trading as well once that begins. The more traders that are attracted to
>futures because of innovative new indices products, then the more they will
>feel comfortable with trading individual shares as futures contracts.
>
>My one concern about the CBOT’s new Dow slate is them canceling the side by
>side trading of the $10 Dow contract. While I understand the political
>popularity of such a move among pit traders, and the desire to recreate the
>success the CME is having with a similar structure, I am not sure the recipe
>works the same if you put the ingredients in to the mix in a different order.
> And I am not sure the ingredients are really the same, as there are some
>different traders and magnitudes of trading in the Big S&P and the $10 Dow
>contract.
>
>Surely there is support for the CME to list the big S&P contract side by side
>with the pit. However, there is a more compelling argument to not fix
>something that is not broken. The introduction of a fourth variable to the
>balance between the pit traded big S&P, the electronically traded emini S&P
>and the pit-traded options could harm the current synergy and ecosystem.
>
>The CBOT is hoping to recreate the CME environment with a much smaller sized
>$10 Dow contract that does not have the magnitude of institutional volume of
>the big S&P. The Dow pit does have liquidity because of the CBOT local
>trader presence, but that liquidity could be quickly marginalized if the new
>$5 Dow contract can attract enough public trader attention. It is much more
>likely the CBOT will see growth in the Dow contracts from the retail sector,
>while this new plan does nothing to help attract more institutional volume to
>the pit. Thus, taking away the a/c/e $10 Dow contract from side by side
>trading poses a risk of disaffecting some of those same retail traders.
>
>The CBOT may have been better off including the $10 electronic version as
>well and have been at the next chapter compared to the CME. Thus, the CBOT
>plays follow the leader with the CME, which is smart given the success of the
>CME with this formula. But they could have played leader, which could have
>proved smarter. But then I have been wrong before.
>
>Regards,
>
>John J. Lothian
>President
>Electronic Trading Division
>The Price Futures Group, Inc.
>
>Disclaimer: This letter is strictly the opinion of its writer, and not
>necessarily those of The Price Group and its management, 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.
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