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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.
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 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.
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