CME CEO Unimpressed With Upstart Electronic Rival
Lingering Fears...
The acquisition of the Chicago Board of Trade (CBOT) by the Chicago Mercantile Exchange (CME) last year was one of the most controversial developments in the history of the derivatives market.
The combined CME/CBOT exchange controls the vast majority of U.S. listed futures volume. While some traders and customers welcomed this development, others worried about concentrating so much market power in one exchange. Critics of the merger, including the Futures Industry Association, warned that the acquisition could have a profound negative impact on competition in the U.S. futures market.
A Rival Emerges...
The CME's market power also worries many firms that control the lucrative over-the-counter (OTC) futures market. These firms are leery of the CME monolith's unrivaled pricing power. They also believe that the CME poses a significant threat to their dominance of the OTC market.
This frustration soon led to rumors that a new electronic exchange would emerge to challenge the CME. Not surprisingly, this new exchange would be funded by many of the same firms that dominate the OTC market.
The rumors circulated for several months. However, little was known about the upstart exchange except for its tentative name - Four Seasons. Thankfully, the fog surrounding this mysterious exchange was lifted (at least partially) earlier this week.
The Four Seasons exchange is now officially known as the Electronic Liquidity Exchange (ELX). The forthcoming exchange is actually a partnership of 12 financial institutions including:
The acquisition of the Chicago Board of Trade (CBOT) by the Chicago Mercantile Exchange (CME) last year was one of the most controversial developments in the history of the derivatives market.
The combined CME/CBOT exchange controls the vast majority of U.S. listed futures volume. While some traders and customers welcomed this development, others worried about concentrating so much market power in one exchange. Critics of the merger, including the Futures Industry Association, warned that the acquisition could have a profound negative impact on competition in the U.S. futures market.
A Rival Emerges...
The CME's market power also worries many firms that control the lucrative over-the-counter (OTC) futures market. These firms are leery of the CME monolith's unrivaled pricing power. They also believe that the CME poses a significant threat to their dominance of the OTC market.
This frustration soon led to rumors that a new electronic exchange would emerge to challenge the CME. Not surprisingly, this new exchange would be funded by many of the same firms that dominate the OTC market.
The rumors circulated for several months. However, little was known about the upstart exchange except for its tentative name - Four Seasons. Thankfully, the fog surrounding this mysterious exchange was lifted (at least partially) earlier this week.
The Four Seasons exchange is now officially known as the Electronic Liquidity Exchange (ELX). The forthcoming exchange is actually a partnership of 12 financial institutions including:
- Bank of America
- Merrill Lynch
- Barclays Capital
- Citadel
- Citigroup
- Credit Suisse
- Deutsche Bank Securities
- eSpeed
- GETCO
- JPMorgan
- Peak6
- The Royal Bank Of Scotland
ELX is expected to launch sometime in 2008. The first product listed on the fully electronic exchange will be U.S. Treasury futures.
ADVERTISEMENTS
Break Through the Trading Frustration
Get the Investor's Guide to System Trading, courtesy of
Daniels Trading. Focus on diversification, system
selection and more.
Get The Free Guide Here!
Get the Investor's Guide to System Trading, courtesy of
Daniels Trading. Focus on diversification, system
selection and more.
Get The Free Guide Here!
Today's Essential Forex Trading Guide
Did you see the dollar today? Market Traders' Forex
Tutorial will show you with vocabulary, charts and more
how to profit from it. Get it free.
Get Your Free Tutorial Here!
Did you see the dollar today? Market Traders' Forex
Tutorial will show you with vocabulary, charts and more
how to profit from it. Get it free.
Get Your Free Tutorial Here!
Auspicious Timing
The timing of the announcement is auspicious for the new exchange. It is also an obvious jab at its powerful rival. The new name was announced on the first day of the annual Futures Industry Association conference in Boca Raton, Florida.
Many readers will remember that the Intercontinental Exchange (ICE) stunned the derivatives world by announcing its counteroffer for the CBOT at last year's FIA conference. The timing of ELX's announcement was clearly designed to invoke ICE's upstart challenge to the CME.
Hard Feelings
ICE's offer at last year's conference completely surprised CME excecutives and sparked a bidding war that lasted for months. The CME ultimately triumphed, but at a substantial cost to shareholders and stakeholders.
Many readers will remember that the Intercontinental Exchange (ICE) stunned the derivatives world by announcing its counteroffer for the CBOT at last year's FIA conference. The timing of ELX's announcement was clearly designed to invoke ICE's upstart challenge to the CME.
Hard Feelings
ICE's offer at last year's conference completely surprised CME excecutives and sparked a bidding war that lasted for months. The CME ultimately triumphed, but at a substantial cost to shareholders and stakeholders.
It is clear that there are still hard feelings from this bitter battle on the part of the CME. That is not entirely surprising given the FIA's harsh rebuke of the merger proposal. The CME is usually a major sponsor of the FIA Expo. However, with the exception of a few executive appearances, the monolithic exchange was completely absent at this year's event.
Potential Rival...Or A Laxative?
One of the few CME executives to attend the conference was CEO Craig Donahue. When Donahue was asked about the new ELX exchange, his response was both hilarious and somewhat crude.
"ELX? You mean Ex-Lax, or whatever they are calling themselves," Donahue said during the "View From The Top" exchange leaders panel. "If I were them, I would have worked with my trademark and branding team to find a trade name that canít be found in the diuretic or laxative space.î
Clearly, the CME does not put much stock in the name of its new competitor. However, with such an impressive pedigree behind it, ELX could eventually emerge as a substantial rival to the Chicago giant. That is, of course, assuming that the exchange even gets off the ground. There are still a number of blanks that have to be filled in before ELX can even think of taking on the CME juggernaut.
Lessons Of The Past
Many in the futures market are quick to dismiss ELX as yet another vaunted pipe dream with no practical chance of success. After all, exchange consortiums have a nasty tendency to implode under their own bureocracy and conflicting agendas.
However, if ICE's surprise announcement taught us anything last year, it was the danger of complacency and underestimating a potentially dangerous opponent. For its own sake, let's hope the CME takes that lesson to heart this year.
"
Many in the futures market are quick to dismiss ELX as yet another vaunted pipe dream with no practical chance of success. After all, exchange consortiums have a nasty tendency to implode under their own bureocracy and conflicting agendas.
However, if ICE's surprise announcement taught us anything last year, it was the danger of complacency and underestimating a potentially dangerous opponent. For its own sake, let's hope the CME takes that lesson to heart this year.
About Mark S. Longo
Mark S. Longo is the founder of The Options Insider Inc. - a firm dedicated to providing free options information, education, news and analysis for options users. Whether it's on TheOptionsInsider.com, a leading online options destination; through Options Insider Radio, the world's only radio network for options users; or through a growing number of newsletters and live events, Mr. Longo continues to provide new ways to spread the word about options.Mr. Longo's analysis of the options market has appeared in a wide variety of domestic and international publications, including The Wall Street Journal, Financial Times, Reuters, Futures Magazine, and more. As one of the few industry commentators with practical options experience, he has developed a substantial following among industry veterans and newcomers looking for insight into this complex market.Mr. Longo began his career as an options trader on the floor of the Chicago Board Options Exchange.
View Mark S. Longo's post archive >
