Chicago meets electronic challenge Alex Skorecki FT.com site; Dec 03, 2003 The pace of change in Chicago is quickening ahead of the arrival of German-Swiss Eurex and its all-electronic US derivatives exchange. In November, the proportion of Eurodollar futures traded electronically on the Chicago Mercantile Exchange leaped more than 50 per cent. Although the amount - 7.8 per cent of the total - is still dwarfed by the floor-traded portion, such a monthly increase is significant considering the CME has had its Globex electronic platform for more than 10 years. Eurodollar futures are the CME's most important product. Total contracts traded in November rose 19 per cent to 812,000, with 40 per cent of this growth on screen. The boost to the Globex electronic platform is coming from a cut in electronic transaction fees and a new programme announced in August to attract more market-makers by offering them a waiver on connectivity fees. Five firms have taken up the offer. CME cut the fees to trade Eurodollar futures by 60 per cent for the bulk of its customers - its members, clearing members and their affiliates. For years there has been resistance to such cuts from Chicago floor traders. Growth in Eurodollar futures is strong both on screen and on the floor because of uncertainty about the future of interest rates. Eurodollars and other short-term interest rate contracts are used to hedge against changes in rates. The equivalent product in Europe, the Euribor, which is traded electronically in London on the Euronext.Liffe exchange, increased by 13 per cent in November. The CME is also planning to boost trade in the Eurodollar future in Europe by cutting fees from next year. Currently, only about 2 per cent of Eurodollar trading comes from Europe. Transaction costs per side will come down from $1.44 to 44 cents, although only for the smaller traders and not big broking houses. Such smaller traders, known as trading arcades, are keen to start trading Eurodollars. The aggressive moves in Europe mirror those by Frankfurt-based Eurex to break into the US market. Eurex US is due to start in February, offering trading in a range of products including US Treasury bond futures, which are currently the preserve of the Chicago Board of Trade. Eurex's main European product is the benchmark government bond future, the Bund. Eurex does not have a rival product to the Eurodollar or Euribor, but having a lower cost base makes it a big competitive threat to both the big Chicago exchanges. However, it believes it is not a zero-sum game. It says its US model will also create new liquidity as cheaper trading fees encourage new players into the market. Trading arcades are a special focus. Their smaller size makes them more sensitive to the costs of collateral for guaranteeing their trades. Eurex and Euronext.Liffe have both seen new liquidity emerge as products previously traded only on the floor have gone electronic. Other CME products traded electronically are also growing fast. Trading of e-mini stock index contracts rose 11 per cent to about 888,000 contracts a day in November. The CME's common clearing link with its rival, the Chicago Board of Trade, is also beginning to take effect. Last month daily trades on CBOT rose 24 per cent. Among CBOT's retaliatory moves is a widening of the range of companies that can qualify for cheaper transaction fees. Earlier this week it announced the first company under this scheme, Fairfax International Investments. Chicago is changing fast, but there is scope for more. Electronic trading still only accounted for 45 per cent of all transactions at the CME in November, down from 46 per cent in October, because the biggest trading gains were in Eurodollar futures, which are mostly traded face-to-face. CBOT says that more than 70 per cent of its futures trade is now electronic.