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Tidbits culled from section C of today's Wall Street Journal and a wacky idea:
The LIFFE is moving Euribor futures to LIFFE Connect this week, trading it
side by side with continued pit trading.
Last week, Eurex introduced a new version of its software, which sounds like
they are incorporating the CBOT's trade matching algorithm, or something
similar. (LIFFE Connect has a similar algorithm. The CME uses first in,
first out on Globex2 when matching up trades.)
The link between LIFFE and the CME should begin in January and allow
customers to offset positions in the Euribor contract against the Eurodollar
contract traded at the CME. (OK, I need someone to explain how this would
work. I swear this is what the WSJ printed.)
Between now and January is a window of opportunity for Eurex to capture some
of the Euribor trading moving to screen based trading.
LIFFE officials seem pretty confident they have superior software in Connect
versus the Eurex's 10-year old system.
**** Notes *****
I like the direction LIFFE is moving. The have dealt with the membership
issue by becoming a for-profit entity. They are methodically rolling out
components and functionality of Connect one and at a time and letting the
market dictate where trading will occur, screen or pit. They are doing a
good job of getting their message out.
By comparison, Eurex recently tried to slip in some new demands to the CBOT
deal and then backed off when the CBOT leaders balked. They seem like they
are still formulating their plan.
I think the Eurex is right for using the proportional order algorithm for
short-end trading vehicles. However, I like the first in - first out method
the CME uses for the E-mini S&P and E-mini Nasdaq. This gives the public the
same opportunity to get a trade as a member and levels the playing field in
contracts that are attracting new traders to the marketplace. I would like
to see the CME go to a proportional order algorithm for Globex2 Eurodollar
trading.
I believe there is great-untapped value in the CBOT and CME, which is being
submerged by the mutualized membership structure. The fight over how to
de-mutualize and how much ownership should be given to each class of member
is going to be a stumbling block for both the CBOT and CME. Full members at
both exchanges, with ties to the agricultural pit trading past and present,
have been reluctant to cede political/voting control of the exchanges despite
the growing influence and importance of Financial product trading at the
exchanges. I find it hard to believe the Full members will be any more
generous when splitting the pot for shares of stocks in the new for-profit
entity. I hope I am wrong about this.
In fact, I would like to suggest the exchanges look at using a potential IPO
as the opportunity to reward all market participants and help cement their
continued support of their exchanges. Brokerage firms, brokers and customers
should be offered the opportunity to enter a lottery to participate in buying
shares for a chunk of the IPO. The number of chances in the lottery would be
dependent on the volume of contracts traded by the specific firms, brokers
and customers on that exchange during the last 12 months.
If it paid off big, the brokers and customers would have additional capital
that might just be used to provide liquidity on the pit or screen based
trading, particularly the screen trading. If it does not pay off big, then
the brokers and customers still have a equity interest seeing the exchange
flourish and would have more reason to choose those exchanges to trade on
when presented with competing screen based trading alternatives. A
restriction on selling a certain percentage of shares the shares for 12 or 24
months would give the exchanges at least early loyalty during the transition
to screen based trading.
I offer this suggestion not without some hint of self-interest. But, I
believe the exchanges need to look beyond their members when trying to find
market liquidity for the post for-profit exchanges' marketplace. I think the
screen is going to win; it is only a matter of time until the pits become the
buggy whips of our era. However, I think the screen-based exchanges that are
going to win are the ones that can provide the best liquidity and depth to
the marketplace. Only time will tell which exchanges will win.
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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