If there are any Chicago dopers with connections to the futures exchanges who might be able to comment on this, or indeed dopers anywhere in the world in the industry, I’d be very interested in anything they had to say.
For people who have no idea what the title of this thread means, the subject is financial derivatives, those complex-sounding things like futures and options. Eurex and the Chicago Board of Trade, two of the world’s biggest derivatives exchanges, were once allies but now are going after each other’s main business. Eurex - which is owned by Deutsche Boerse AG and SWX Group, the operators of the main German and Swiss securities exchanges - is offering trading of futures and options on U.S. Treasury debt. The CBoT has said it will take the equivalent step by offering futures and options on German government debt.
The big difference between Eurex and the CBoT is that the CBoT is an exchange in the sense that Americans who have seen “Trading Places” or “Ferris Bueller’s Day Off” think of one - a place with a trading floor where a bunch of guys wearing colored jackets yell and wave at each other. Eurex is an electronic exchange - all trading is done via computer, so it takes place in the offices of the banks and brokers that belong to the exchange and there’s no trading floor at all.
That means Eurex has had the great advantage over traditional floor-based exchanges of making trading a much lower-cost proposition for the exchanges’ customers. And now that Eurex and the CBoT are going head-to-head, I can’t help recalling what happened on another occasion that Eurex took on a floor-based competitor, the so-called Battle of the Bund with the London International Financial Futures and Options Exchange.
Liffe started trading a future on Bunds (longer-term German government bonds including the benchmark 10-year maturity) in 1988. It became the main European bond future, equivalent to the CBoT’s future on the U.S. 30-year Treasury bond. A competing German exchange, the Deutsche Terminboerse, had its own Bund future, but about three-quarters of all trading in Bund futures took place on Liffe, not the DTB.
In the mid-'90s the DTB and its Swiss counterpart developed an electronic system for trading derivatives called Eurex. (The DTB and the Swiss derivatives exchange later merged to form Eurex the company, as distinct from Eurex the trading system.) In the middle of 1997, they started offering electronic trading of Bund futures. Within a year, Liffe’s share of trading in Bund futures had dropped to about 10%.
In mid-'98, Liffe said it would speed up development of its own electronic trading system and fire more than half of its own staff. The exchange closed its trading floor in 1999 to concentrate on selling its own system (which the CBoT is licensing) and is now part of Euronext NV, the company that owns the Paris, Amsterdam, Brussels and Lisbon stock exchanges.
I’m not saying the situation is set to repeat itself now with the CBoT in Liffe’s role -that was the first time such a thing had happened, and the U.S. exchanges are more focused on having to operate as profit-making businesses with competitors. Liffe just wasn’t thinking in those terms when Eurex started electronic Bund trading and as a member-controlled organization had more difficulty reacting when it became clear that business was moving to Frankfurt. (The CBoT in 2000 reincorporated as a not-for-profit corporation; the nearby Chicago Mercantile Exchange is a publicly listed company.) Still, I’d be very interested in any informed observations on how things might shake out.
IIRC the CBoT has operated a variety of electronic systems for a decade or so - anyone able to provide info on the extent to which screen trading takes place now, especially the internal politics of the issue? I also note that earlier this month, the New York Stock Exchange approved the removal of some restrictions on the NYSE’s own electronic trading system that IMHO made use of the system unrealistic.
Disclaimer: I’m more familiar than the man on the street with the financial-services industry, but by no means an expert on the futures exchanges. All of the above is IIRC and aided by some website research.