|
PureBytes Links
Trading Reference Links
|
**** The following is an essay I wrote for today's FutureSource
Fastbreak Newsletter:
When Eurex US gets regulatory approval to open its US Futures
Exchange it will announce a launch date and jump right into competing
in the U.S. Treasury futures market. It will take on the CBOT head
to head. It will capture market share because of its all-electronic
trading on a tried and true trading platform and low pricing
structure. At least that is the myth.
The reality is likely to be something completely different. It could
well start out that Eurex US looks a lot like the Brokertec Futures
Exchange, except with someone other than the big Wall Street
brokerage firms footing the bill. Eurex US may look a lot like Eurex
AG, which is the Frankfurt parent exchange. That is not to say that
Eurex US could not transform itself into something different (read
more retail trader friendly) down the line, but from the looks of
things this is what I see.
Eurex US is likely going to cater to the large institutional players,
while playing lip service to democratic markets and level playing
fields for traders of all sizes. Why do I say that? For one because
I can't find word one on the Eurex US web site about educating the
public about futures trading. Despite being only a little more than
three weeks away from their planned launch date (pending regulatory
approval), there is no educational material about futures trading on
the Eurex US web site.
I took a look at the web site of the parent exchange hoping to find
some educational materials. There is a plethora of courses and
online tools, but the "Introduction to Futures & Options" publication
they offer only comes in German, according to their web site. I
don't know if this means that Eurex does not plan on the
participation of new traders from the public realm or that they are
going to outsource their educational efforts. If so, that has yet to
be announced and the clock is ticking.
Eurex AG does offer in person trading seminars on its web sites for a
fee, but during the next few months their web site says the seminars
will be offered in places like Frankfurt, Stuttgart, Munich and
Zurich.
Needless to say, we are three weeks from when they want to launch and
these things are still unknown. As a broker I want to know what
Eurex is going to offer because I want to be able to keep myself, my
firm and my clients informed about new markets and new trading
opportunities.
Many times my firm and/or firms like it often work with exchanges in
seminars, online webinars and micro web sites to promote both the
exchange and its products, and the brokerage firms. I don't see any
signs of that happening anywhere with Eurex US.
For example, the CBOT has introduced product focused micro web sites
for interest rates and equity products. The CME Electronic Transition
Committee own web pages dedicated to helping members (and non-
members) make the transition from floor-based markets to electronic
trading. The Electronic Trading Resource Guide section on the ETC
site say it has over 1000 links to sites such as exchanges, quote
vendors, FX, charting software, newsletter opinions and chat rooms,
global resources, as well as tax help for traders.
Both of these long established Chicago exchanges are making sincere
efforts to educate the public about futures trading and attract new
traders to the markets. This is an essential function for building a
deep multifaceted pool of liquidity, with the participation and
ongoing entrance of traders of all sizes and types. This is where
price discovery happens at its best. Trust in the validity and
fairness of the price discovery process is essential for the use of
the market to transfer real risk from hedgers to speculators and back
again.
I have a theory I foist on people from time to time to explain the
markets that involves traders as different sizes and types of fish.
Retail traders are of course the small fish. Exchange members and
proprietary traders are the medium fish. The big fish, or sharks,
are the large institutions. Medium sized fish can be sharks too (or
really big catfish) as we all know, but they are still medium sized
sharks.
A market, like an underwater ecosystem, must be friendly to the
smallest participants to attract larger participants. It starts with
the small fish. An exchange-traded market must attract small traders
to be able to attract the medium traders. Once you have the small
and medium traders, it is easy to attract larger traders.
Perhaps the best recent example of this is the emini S&P. It started
off as a retail focused product, with barriers to keep the big fish
out. Order size limits have been gradually expanded to allow larger
and larger participants to trade. And so they have. The emini S&P
growth has been nothing short of phenomenal and the maximum order
size limit is about to jump from 250 to 400 contracts.
When emini S&Ps started trading the maximum order size was 30
contracts. Any order over that was supposed to be sent to an open
outcry pit for an all or none execution. That facility has hardly
ever used by the big fish/traders. Instead the big fish preferred
acting like little fish 30 lots at a time, while increasingly
lobbying for larger and larger maximum orders sizes.
Even many of the exchange member liquidity providers, members in the
pit or in front of screens, started out as little fish. The CBOT for
many years used the now shuttered MidAmerica Commodity Exchange as a
small fish bowl of a training ground. There, traders learned how to
trade without having to worry about the dangers of the big fish.
One of the reasons I am a big proponent of single stock futures is
because they are smaller contracts that give traders space to learn.
So far single stock futures are a market of small fish, some medium
sized fish market makers and a couple of rather friendly large fish.
It is a small fish and trader friendly environment.
Other small fish and trader friendly markets are the emiNY Crude Oil
and emiNY Natural gas markets of the NYMEX that trade on Globex.
Yes, there are large players who dominate the big open outcry
markets, but the small fish can efficiently interact with the medium
sized fish market makers while having the advantages of electronic
trading and avoiding the disadvantages of being a small fish in a big
fish dominated market.
The CBOT's Mini Gold market set a new volume record on Tuesday,
January 6th. This is a market with small and medium fish/traders
interacting; again avoiding the pitfalls of being a small fish in a
big fish dominated open outcry market. This is a market that demands
your attention when price action turns volatile and active.
Another element of the Eurex US exchange that is not small fish
friendly is the limited number of contracts they are listing. While
I have no doubt in time they will list many different contracts, they
are starting out as a narrowly focused fixed income exchange. In
this Eurex US looks a lot like the shuttered Brokertec Futures
Exchange. Brokertec never even listed options on their Treasury
products. Options are an important part of the ecosystem of current
futures markets as the liquidity of the futures is used to hedge
option positions and buying and or selling options helps manage
futures positions. Without a dynamic, integrated and transparent
options market, there are fewer hiding places for the small fish
trader.
Small fish are important to a market. It is their thrashing around,
reversing directions and scurrying about that that exposes the large
and medium fish hiding behind the rocks and lurking in the weeds.
Small traders are essential for the price discovery process. But so
are medium fish and large fish/traders. Building a dynamic, multi-
faceted pool of liquidity is not something easy to do and it takes a
market environment friendly too all types and sizes of traders to
realize it.
Attracting the little fish/traders means building trust with them.
Enacting liberal block trading rules that favor large/fish traders is
not going to attract the small fish, as the Brokertec Futures
Exchange experience can attest. Brokertec had other issues, but it
starts with building an environment where the small fish/traders want
to participate.
Attracting the little fish/traders means offering a fair playing
field, with transparency for all participants to see and interact
freely with the market. The water and markets get murky and
threatening for the smaller fish when the big fish just talk (calling
around negotiating trades) to the other big fish.
Of course by my standards I am just a shiny fore-headed little fish
from Chicago and Eurex AG is the largest futures exchange in the
world by volume that just finished a year where they traded over 1
billion contracts. So what do I know?
Regards,
John J. Lothian
Disclaimer: The opinions expressed are is strictly the opinion of
John Lothian, and not necessarily those of his employer, 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.
Security futures are not suitable for all customers.
Futures and options trading involve risk. Past results are no
indication of future performance.
------------------------ Yahoo! Groups Sponsor ---------------------~-->
Buy Ink Cartridges or Refill Kits for your HP, Epson, Canon or Lexmark
Printer at MyInks.com. Free s/h on orders $50 or more to the US & Canada.
http://www.c1tracking.com/l.asp?cid=5511
http://us.click.yahoo.com/mOAaAA/3exGAA/qnsNAA/zMEolB/TM
---------------------------------------------------------------------~->
Yahoo! Groups Links
To visit your group on the web, go to:
http://groups.yahoo.com/group/realtraders/
To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxxxxxx
Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
|