In Today's Tribune part 1

Discussion in 'Index Futures' started by traderjb, Oct 12, 2003.

  1. "By Mark Skertic
    Tribune staff reporter

    October 12, 2003

    Like a ward boss dealing with an upstart aldermanic candidate, the Chicago Board of Trade and Chicago Mercantile Exchange are calling in favors, making promises and exerting political pressure.

    Their goal: to solidify their positions before the new, all-electronic U.S. exchange operated by Eurex AG moves in on Chicago's turf in U.S. futures trading.

    Critics claim that the CBOT and the Chicago Mercantile Exchange, through efforts here and in Washington, D.C., also are trying to derail or delay the planned Feb. 1 start of Eurex trading. Among the tactics:

    - Both have stepped up lobbying efforts in Washington. This week, for the second time this year, a House agriculture subcommittee will hold a hearing over concerns about unfair competition prompted by Eurex's impending arrival.

    - Spending by the CBOT's and Chicago Mercantile Exchange's political action committees has increased. Through August, the CBOT has increased spending 13 percent compared with all of last year.

    - The Chicago Board of Trade has offered a deal to shareholders of Clearing Corp., a move that could thwart Eurex's hopes of owning 15 percent of the clearinghouse. The CBOT is severing its ties with Clearing Corp., and if the Eurex deal falls apart, Clearing Corp.'s future may be uncertain.

    "They're politicking themselves into the ground," said Christopher Culp, a University of Chicago professor and senior fellow in financial regulation with the Competitive Enterprise Institute in Washington, D.C. "Frankly, the reputation they're getting is of people who run to Washington for help, rather than to the marketplace."

    The two Chicago exchanges are strong enough to survive and challenge Eurex without government help, Culp said. "Maybe they don't intend for these to be roadblocks, but it looks like they are."

    Critics say that concerns raised with lawmakers could slow the Eurex's application, giving the Board of Trade time to move clearing of its trades to the Mercantile Exchange and work out any problems with a new electronic trading platform.

    Eurex applied to the Commodity Futures Trading Commission for permission to operate a U.S. exchange in September. Under terms of the 2000 law that governs CFTC operations, an application is approved within 60 days unless the commission finds problems.

    For Eurex, the 60-day period would expire on Nov. 17. If it's moved off the fast track and goes through the 180-day review process, the deadline for commission action would be March 15. If no decision is made by that day, Eurex would have permission to operate.

    While Congress doesn't have the authority to approve or turn down Eurex's application, House leadership can send a clear signal if they believe the application process should move slower.

    The Board of Trade's recent efforts are not an attempt to throw up roadblocks, said Charles Carey, the CBOT's chairman. "That's what they want you to believe," he said. "We're the ones who made the bold moves, and they sat back and said we couldn't accomplish our goals. And we did it."

    Recent changes at the CBOT have included rewriting internal rules so it can give its board more authority, as well as opening up membership to commodity pool operators and other large investment funds. Those moves are efforts to keep large pools of cash from moving to Eurex.

    There also have been some key countermoves made in response to Eurex. In November, for example, the board will begin moving the clearing of its trades to the Chicago Mercantile Exchange, the nation's largest futures exchange and historically a CBOT rival. At the same time, the board will start phasing in a new electronic trading system. Trading on a computer screen, instead of on the trading floor, has experienced rapid growth.

    "What we have tried to gain, by this whole process over the last year, is preservation of the integrity of the marketplace," said Bernard Dan, the CBOT's chief executive.

    But some who make their living in LaSalle Street's financial district believe the exchange's efforts are motivated by personal concerns.

    "This is a move strictly to preserve the income that they have been able to glean through their monopolies," said Russell Wasendorf, chairman and CEO of Peregrine Financial Group Inc., a futures commission merchant.

    "This is embarrassing," Wasendorf said. "Blocking Eurex is simply going to be looked at by investors as a dirty trick. I don't think most investors will appreciate it very much."

    Last week, some Clearing Corp. members began contemplating an offer by the Chicago Board of Trade that guarantees shareholders in the clearinghouse that they won't lose money by turning down a deal to reorganize and sell a 15 percent share to Eurex.
  2. Clearing revamp is critical

    If the reorganization is rejected, a crucial part of Eurex's entry plan would be undermined. The Clearing Corp.--which historically cleared Board of Trade transactions--guarantees trades to both buyer and seller before money changes hands. The board announced earlier this year that it was moving operations to the Merc after members raised concerns that the Clearing Corp. was too willing to work with Eurex.

    The CBOT's offer would guarantee funds in a clearing account at the Mercantile Exchange in the event the Clearing Corp. reorganization is turned down. In effect, the offer takes away some of the uncertainty that might prompt some small Clearing Corp. shareholders to vote for reorganization only to protect the value of their shares.

    The reorganization is a good plan that should be approved, said Michael C. Dawley, chairman of the Clearing Corp. board. "I'm hopeful that shareholders will vote on the business proposition and not emotion," he said.

    Eurex Chief Executive Rudi Ferscha has called the addition of a U.S. version of his exchange a good thing for Chicago because it solidifies the city's position as the center of futures trading.

    But, because Eurex is all-electronic, some worry it will hasten the demise of open outcry, with traders jostling in pits, fighting for the best deal.

    The financial impact of Eurex US for investors is still unknown. The exchange has promised low fees and no membership costs, something its executives maintain it can provide because it has no costly trading floor to maintain. Instead, Eurex will be run out of offices in the Sears Tower.

    The Board of Trade and Merc have been re-evaluating fees, and they argue that their volume, electronic-trading capabilities and the competition in trading pits all combine to ensure traders get the best price on transactions.

    Officials at the Merc declined to comment on their strategy preparing for Eurex, saying that appropriate comments will be made at this week's subcommittee hearing.

    Merc officials also declined to discuss spending on political action committees or other lobbying efforts. The CBOT's Carey and Dan also cautioned against drawing any connection between their concerns about Eurex and PAC spending.

    Executives from both Chicago exchanges have met with Speaker of the House Dennis Hastert (R-Ill.) to air concerns.

    The Board of Trade's PAC has spent $152,938 so far this year, while the Merc's has handed out $292,667, the most either has given since 2000, a presidential election year when giving is typically higher.

    The exchanges' concerns will be aired in Washington on Thursday before a meeting of the House Agriculture Subcommittee on General Farm Commodities and Risk Management. A similar hearing was held in June, when Merc and CBOT officials warned that Eurex might pose an unfair threat to competition.

    Rep. Tim Johnson, an Urbana Republican, is the only member of the Illinois delegation on the committee. Johnson said he wants to know why Eurex is on a fast track for review and approval.

    "There seems to be a rush to judgment, and we're talking about the future of the entire U.S. futures market," Johnson said.

    "What does this mean for jobs? What does this mean for the futures markets? What does this mean for our federal budget? What does this mean for the farmer in Watseka (Ill.)?" Johnson asked.

    "Those are questions I haven't had answered."

    Eurex's arrival is not a risky proposition, said John Damgard, president of the Futures Industry Association. "Competition invariably improves markets," he said.

    "This new exchange will bring commerce and revenues from Frankfurt to Chicago. Eurex has chosen The Clearing Corp., a Chicago institution, as its clearing partner, and the National Futures Association, another Chicago institution, for its self-regulatory activities.

    "Just as important, this new exchange will allow U.S. customers who previously traded Eurex products in Europe to trade those same products on a U.S. exchange, subject to U.S. regulation, with oversight by the U.S. Congress. This is good, not bad."

    Why limit free markets?

    The irony of two of the largest exchanges in the world--bastions of the free market and competition--being worried about foreign competition has not been lost on industry observers. So far, there have been no compelling reasons offered for keeping Eurex out, said Hans R. Stoll, director of the Financial Markets Research Center at Vanderbilt University in Nashville.

    "I don't think it adversely affects our national security," he said. "The U.S. is known for its competitive system, and it's not obvious to me that having a new competitor--whether they be from abroad or from within the U.S.--is such a bad idea."

    The Merc and CBOT already have an advantage, he said. "The fact that if you have a volume, it's very hard for anyone to take it away from you--because volume generates volume," Stoll said.

    "So, it's very hard for a competitor to come in and effectively compete unless the existing market is quite inefficient," Stoll added. "And in that case, all the better for our competitor to come with low-cost transaction services."

    Copyright © 2003, Chicago Tribune
  3. Exactly - that's why Chicago is so afraid.
  4. Ditch


    These guys are scared shitless, only thing that saves them for the moment is that Eurex doesn't offer futures on an US-stock index yet.
  5. The CBOT's Carey and Dan also cautioned against drawing any connection between their concerns about Eurex and PAC spending.

    Yeah, right!
  6. burnin


    there will be 50k people looking for work
    not only the floor personal but administrators, lawyers, back office people, you name it.........time to buy puts on land in Lincoln Park

    the floor is scrambling, those people who are left are scared shitless and most have done nothing to move forward,,,
    they will be in the toilot when it flushes.

  7. corvus


    What are you talking about? They will just learn how to sit at a desk and use computers like the rest of us.
  8. Maverick74


    I hate to spoil the party here but most of the guys on the floor, or at least many of them trade on the floor the first 2 hours and then go upstairs and trade on the screen the rest of the day or until the close. These traders don't really care one way or the other. They make just as much money on the screen as they do in the pit. And just so you know, the big traders there in the treasury complex trade options, not the futures, and 99% of the order flow goes into the pit.

    Oh and something else, I know a lot of guys that stand in the pit with a slab that do nothing but trade on the screen. They just stand in the pit to see who is doing what. I think a lot of people are really blowing this Eurex thing out of proportion here. If you are a good trader you can trade anything, anywhere period. And I will say this, 99% of those guys on the floor could eat most people's lunch on this board. Those guys are some of the sharpest, quickest, and most disciplined people you will ever meet in your life. That is why a majority of them have excelled at everything they have done in their life including sports. Many of them own very successful business on the side as well. Some of you guys need to get a grip. If clearing fees are hurting your bottom line that bad, you might want to think about becoming a paralegal assistant.
  9. Looking at what happened to traders on LIFFE, some made the transition to screens, some did not.

    Whether that was due to not being able to see the order flow, or first come first serve rather than pro rata order filling, or any other reasoneither way would be surprised if it is massively different in Chicago.