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Options Trading on the Net?

The Chicago Board Options Exchange, the biggest options exchange in the world, may be in for a dogfight in the next year, if William Porter has his way. Last November, Porter, the founder of E*Trade, the Internet-based equity brokerage, announced the formation of the International Securities Exchange, an Internet-based options trading system set to launch early next year, initially listing 600 stock option contracts.

The CBOE has cause for concern. The speed with which the all-electronic Eurex brought the London International Financial Futures Exchange to its knees, and the instantaneous transfer of volume at the Matif from open outcry to its electronic trading system when the Matif began intraday electronic trading last spring, signaled to many that open outcry’s days are numbered. The Wall Street Journal has even reported that rumors of Porter’s plans spurred the Pacific Exchange to negotiate a merger agreement with the CBOE. The implication: the PCX saw Internet-based trading come barreling onto the scene, and it ran for cover.

But not everyone agrees that open outcry is dead to rights. The much-publicized Cantor Exchange, the new quasi-electronic Treasury futures exchange run by Cantor Fitzgerald, has produced anemic volume numbers since its launch last year, while the Chicago Board of Trade’s open-outcry Treasury futures enjoyed robust trading activity. Some point out that Europe’s embracing of electronic trading has more to do with a too-brief history of open-outcry trading—the Liffe opened in 1982—than with the intrinsic superiority of electronic systems.

Still, the CBOE is not viewing the ISE with complacency. The ISE “signals new and intensified competition on the technological front,” says CBOE chairman William Brodsky. “It is a battle we take seriously—and one we intend to win.”


PHLX’s Internet Flavor of the Month

The Philadelphia Stock Exchange, the self-styled king of sector indices, last month launched an Internet stock index. TheStreet.com Internet Sector index joins a crowded field of Internet indices, which seem to be popping up almost as fast as Internet companies themselves.

The key to Internet indices, it appears, is name recognition. TheStreet.com is a web site run by the ubiquitous James Cramer that offers market data, stock picks and other business ephemera. The new Internet index comprises “20 leading companies involved in Internet commerce, service and software,” says the PHLX. It began trading at the exchange on December 9, 1998.


TSE Tries New Index

The Toronto Stock Exchange, the biggest Canadian derivatives exchange, announced last month its intention to allow Standard & Poor’s to create a new equity index, the S&P/TSE 60. The new index will account for financial performance and share liquidity in addition to capitalization, and will replace the TSE 35, TSE 100 and TSE 200 indices.

The TSE hopes the new index will improve investor confidence in TSE index products and thus boost derivatives trading in the struggling Canadian market. A recent scandal involving Bre-X, the gold-mining firm whose fraudulent gold discovery sent the TSE 300 tumbling downward, highlighted a major limitation of TSE indices—they had been based solely on market capitalization. If the new formulation had existed at the time, Bre-X would not have been included in the TSE 300 because it had no earnings history.

Deaths at Liffe

Electronic trading may not be taking U.S. derivatives exchanges by storm, but in Europe it is all the rage. The Liffe is the first bona fide casualty. Last November, it announced it was slashing some 60 percent of its work force—between 600 and 1,000 jobs—in an effort to cut its operating costs in half by the end of this year.

The culprit: Eurex, whose swift and decisive theft of the Liffe’s Bund contract shocked the derivatives world. “It is clear that nothing remotely like our current cost base is sustainable, and that we shall have to cut jobs to remain competitive,” said Liffe chairman Brian Williamson when announcing the layoffs last November. “We have to deliver an efficient trading platform and products that our customers want at a price they are prepared to pay.”

Meanwhile, merger rumors are swirling. The most prominent: that Liffe will join forces with the Chicago Mercantile Exchange to fight the Eurex/Chicago Board of Trade axis, which plans to launch an all-electronic trading system that cross-lists Eurex and CBOT products later this year.

At the same time, the Matif and Italy’s MIF announced an alliance last month whereby money market contracts would be cross-listed between the two exchanges, much like Matif’s deal with the Spanish MEFF earlier this year. The impetus for the deal appears to be the run-up to the euro, which dramatically reduced volatility in European bond markets.

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