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----- Original Message -----
<DIV
>From:
John J. Lothian
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Friday, January 09, 2004 4:18
PM
Subject: [RT] The Eurex US Myth, A Fish
Story
**** 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.
LothianDisclaimer: 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.
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