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The Great Exchange
BY NINA MEHTA
Some exchanges were busy reinventing themselves in 1998 with electronic initiatives and new alliances. Others opted for a few nips and tucks.
Derivatives exchanges are a competitive bunch. Over the past few years, they've developed chronically twisted necks from looking over their shoulders to make sure their rivals weren't gaining on them. But in the past, they knew what they were up against. Now, they're not entirely sure. Proprietary electronic exchanges that don't have the burden of maintaining floors are fast becoming potential players, and cross-border alliances are being struck up in every geographical direction in order to secure market share and stave off direct product competition.
“The industry is changing very fast. It is going to change radically and is going to be driven by the demands of customers,” says Hugh Freedberg, Liffe's chief executive. “Customers are going to get increasingly vociferous about wanting their needs met in a highly efficient, cost-effective manner. What's inevitable is that the demands of big customers who have the capital to make markets and control order flows are going to force established exchanges—wherever they are—to change in the way we at Liffe have been forced to change. It's not a question of if, but when. And the most interesting question is how they will go about doing this.”
After losing its Bund contract to Eurex last year, Liffe decided to switch to electronic trading full stop, and to recast itself as a screen-only enterprise. Matif decided to do the same after it was bought by the technology-savvy SBF, but got a jolt when the markets and traders moved faster than it did, abandoning interest rate pit trading almost overnight. The Toronto Stock Exchange has decided to switch its futures business to electronic trading as well, albeit for different reasons. The TSE believes that fully automated trading can boost volumes in smaller markets, “because it means that to trade your contract, participants don't have to have someone physically on the floor full-time,” says Stephen Rive, vice president of derivative markets. In an electronic environment, “your market could be just a window or a line on a screen beside other markets.”
Over the course of last year, it has become nearly a premise, as Leo Melamed, chairman emeritus of the Chicago Mercantile Exchange, recently put it, that in the long run “floors will capitulate to electronic trading.” Even in Chicago, the world's most stalwart open-outcry outpost, the capitulation has begun. The Chicago Board of Trade last year snapped into action and rolled out side-by-side trading on its benchmark Treasury products when the Cantor Financial Futures Exchange said it would initiate electronic Treasury futures trading. (The Cantor exchange, however, turned out to be a lot of smoke and little liquidity, in large part because it wasn't really a wholly electronic exchange.) The Merc faced its own challenge when EBS announced it would offer screen-based forward rate agreements for the eurodollar market. The Merc's response was to launch side-by-side eurodollar trading this year.
With competition looming, cooperation seems to be the answer. Perhaps what's most significant about the current environment is that no exchange has ruled out partnership deals. Alliances are being formed by exchanges large and small. Among the most famous: the American Stock Exchange and Nasdaq exchanged rings and are now bringing the Philadelphia Stock Exchange into the family, while Matif is reaching out to regional futures exchanges in Europe, and has signed a platform-sharing alliance with the Merc and the Singapore International Monetary Exchange.
Yet not all alliances went off like clockwork. The most conspicuous: the CBOT/Eurex alliance, the Chicago Board Options Exchange/Pacific Exchange merger, and the common-clearing initiative between the CBOT, the Merc, and the Board of Trade Clearing Corp., which was rejected by the CBOT membership. At the CBOT in particular, the struggle is between members of the old guard and the new—open outcry vs. automated trading. But one upshot of the soured alliance with Eurex is likely to be that the CBOT will begin direct product competition with the German-Swiss exchange in the near future.
Last year, in the run-up to European economic and monetary union, the battle for benchmark products grew intense. On the short end of the yield curve, Matif and Eurex are betting that Euribor will become the new benchmark for the European money market. Liffe, which says it is sitting on approximately 80 percent of the short-term rate market, has decided to list both Euribor and London-calculated Euro-Libor products and let the market choose. Meanwhile, the equity index war is underway for a benchmark European index, with FTSE, Morgan Stanley Capital International and Dow Jones Stoxx all in the mix. It's unclear, for now, which index will wind up on top.
What follows is a look at the exchanges' critical events of 1998—and what's coming down the line in '99.
Last year was one of screaming headlines and booming business at the Chicago Board of Trade. Total volume shot up to a record 281 million contracts, an increase of 22 percent over 1997. Electronic trading on Project A doubled during the year, totaling 12.3 million contracts. And eight of the CBOT's top 10 trading days of all-time occurred in 1998.
The CBOT made other news as well late last year when the membership rejected Patrick Arbor's bid for a fourth term as chairman, in favor of David Brennan, a third-generation, 41-year-old soybean trader who criticized Arbor for too aggressively seeking alliances with other exchanges and screen-based trading. Then, earlier this year, the membership rejected the pending alliance with Eurex, causing many to speculate that the locals' stand-pat position on open outcry could harm the exchange's status in the future.
It's easy to see why locals are hunkering down: the pits have been bustling as never before, and business doesn't seem likely to lag. In addition, the CBOT's retail-driven Dow Jones futures contract has proved to be the exchange's most successful new contract ever in terms of volume and open interest—an indication that the retail market is much bigger than naysayers had predicted. The CBOT is also preparing to tap into the electricity markets, which are poised for rapid growth as deregulation continues. Last year, it launched three futures contracts based on the physical delivery of wholesale power, to compete with Nymex's growing electricity business, which now includes four contracts. To up the competitive ante, Nymex recently listed a PJM (Pennsylvania–New Jersey–Maryland) contract for the active eastern regional hub; the CBOT will probably follow suit with a similar product.
Last spring and summer, the CBOT also launched inflation-linked Treasury futures after some friendly arm-twisting by the U.S. Treasury Department, which believed a futures market would improve participation in its debt auctions. The CBOT didn't want to dispute that logic, and thereby ruffle governmental feathers, so it brought out the contracts. Volume has been “virtually nil” thus far, admits Patrick Catania, vice president for business development, but he notes that it could pick up if there is enough additional issuance “so that there is portfolio risk for those holding the [inflation-linked] notes.” The CBOT is taking the same wait-and-see approach to its catastrophe contracts, which were unveiled last year. The contracts have hit 16,000 in open interest so far, but see little trading on a daily basis.
The exchange's major goals for 1999: to cut costs by possibly linking with other, unnamed Chicago exchanges; to solidify its franchise through electronic distribution; and to ratchet up its European business. The CBOT's U.S. debt and equity products have already been pulling in more interest from European institutional investors, and the exchange expects this to continue in response to changes in risk management caused by European monetary union. “The diversification into equities, certainly after the first round of conversion, will take place in U.S. blue chip equities—precisely the stocks represented by the DJIA,” says Catania. Meanwhile, the defeat of the Eurex alliance “opens up the potential for us to look at other European-denominated products.” And that means head-to-head competition.
| CHICAGO MERCANTILE EXCHANGE |
Perhaps the biggest news at the Chicago Mercantile Exchange, the world's third-largest derivatives exchange, is that it has chosen to actively pursue screen-based trading. Last November, the board of directors voted to begin side-by-side trading this June on the exchange's flagship eurodollar futures contract, a decision the membership approved overwhelmingly in January. Merc executives were strikingly candid about their reasons. Noting the threat posed by London-based EBS Partnership, a coalition of global banks that announced it would launch an electronic cash equivalent of a eurodollar future, chairman Scott Gordon called EBS “a competitor of the most serious caliber,” and added that “We cannot, and must not, let EBS get a foothold in our market.” Rick Kilcollin, Merc president and CEO, announced that side-by-side trading would “[help] us guard our coveted position while giving customers an important choice.”
The Merc is now ramping up Globex2, unveiled last September, to support daytime trading. Globex2 terminals are being installed around the eurodollar pit, and training has begun for exchange members on everything from basic PC education to electronic trading strategies. There are 700 terminals in use, but the exchange says the number will grow as software vendors write new front ends to the Merc's application programming interface (API). Later this year, Merc traders will also have after-hours access to Matif products on the same screens that access the eurodollar market. The two exchanges have added the Singapore International Monetary Exchange to their platform-sharing alliance, so a slew of product cross-listings is likely to show up on the radar soon. In addition, in an effort to preserve the dominance of locals, the Merc has begun testing hand-held devices in the British pound pit (as a precursor to their use by eurodollar traders) that will enable locals to remain where they are and at the same time make markets on Globex2. “This will also keep the open-outcry and electronic markets close together, since locals can arbitrage between the two,” notes a Merc vice president.
In its active currency market, the CME has launched a number of euro products. Euro FX futures, listed on January 4, trade in the Deutsche mark pit and will ultimately replace Deutsche mark futures, one of the exchange's most liquid products. (In January, the contract broke volume and open interest records for new currency products at the Merc.) Meanwhile, the Euro FX cross-rate futures, which reflect the value of the euro in British pound, yen and Swiss franc, trade electronically on Globex2. Options on the cross rates trade open outcry during the day and electronically after hours.
Overall, last year was a record year at the Merc, with 226.6 million contracts changing hands. Turnover was up 12.9 percent over 1997 and more than 10 percent over 1994, the previous record year, when the Fed raised interest rates and volume hit the sky. Last September the exchange also surpassed 10 million contracts in open interest—a record for any exchange, says the Merc official. Eurodollar futures volume increased 9.7 percent to 109.5 million contracts, with options ending the year at 24.6 million, up nearly 11 percent. S&P futures and options totaled 36.4 million contracts in 1998, and the Merc's successful e-mini S&P contract continued its power walk to become the exchange's fifth-largest contract in total volume by its one-year anniversary last September. Four-and-a-half million e-mini contracts traded last year.
Looking toward the future, the Merc has announced it will actively seek alliances with other exchanges as well as with technology and information vendors. The Merc is also prepared to alter its corporate governance structure to enhance an alliance, if and when that becomes necessary. Although last year's ambitious common-clearing agreement between the Merc and the CBOT fell through when the Board of Trade membership rescinded its vote, the Chicago exchanges now have plans for cross-margining and common banking that should help trim the operating costs of member firms.
| CHICAGO BOARD OPTIONS EXCHANGE |
In late 1997, the Chicago Board Options Exchange began listing options on the Dow Jones family of index products. The CBOE's option on the Dow Jones Industrial Average, the lead new product, “proved successful in 1998,” says William Brodsky, chairman and CEO, trading more than 4 million contracts last year, but it wasn't quite the raving success expected. A spokeswoman at the exchange notes that the use of index options doesn't normally parallel a rising equity market and that the DJIA option will “come into its own when the market starts to go down.” Yet even with the new Dow index family adding to its numbers, the exchange's overall index volume was down 4 percent last year, to 68.3 million contracts. Structured products and country indexes didn't register significant activity over the course of 1998.
Equity options, however, posted a stunning 19.4 percent increase over 1997 volume, with 138.5 million contracts trading. Volume was buoyed by the acceleration of Internet and computer-related stocks, but even without that sector, “the options business is still growing extremely rapidly,” says Brodsky. Nonetheless, the world's top options mart is not standing still. With an eye fixed on the growing threat of upstart exchanges such as the International Securities Exchange, the offspring of E*Trade and Compaq that plans to offer electronic options trading, the CBOE is striving to make itself increasingly accessible to investors.
The exchange is cranking up its electronic order-routing and order-execution systems, as well as developing its own screen-based trading system to make access to its markets cheaper, swifter and more efficient. “Twenty-eight percent of all our orders are now executed electronically, and 85 percent of our business comes in electronically and goes out electronically,” says Brodsky. The CBOE expects investor demand for real-time execution and greater efficiency to continue to rise, and has begun offering institutional cost savings on orders executed electronically.
Like one of its Chicago brethren, the CBOE announced a grand alliance plan last year, and, like the other exchange, later changed its mind. The CBOE called off its planned merger with the Pacific Exchange after the Department of Justice said it would investigate antitrust issues (the merger would have resulted in a 65 percent options market share for the combined exchange, compared with the CBOE's current 51 percent). The CBOE decided it couldn't afford the delay since its plate was already piled high with the demands of screen-based trading, the threat of electronic competition from the ISE and ongoing year 2000 issues.
Last year, the American Stock Exchange swept past earlier volume thresholds in just about every category. It was the best year in options volume, with 97.7 million contracts changing hands, the best year for Standard & Poor's Depositary Receipts (Spiders) and the best year in total index share volume. The SPDR Trust, which owns the stocks in the S&P 500 and was designed to track the index's price performance, along with the dividend yield of the underlying stocks, had amassed $12.8 billion in assets by the end of 1998, more than double the amount at the end of 1997. Diamonds, a similar product based on the Dow Jones Industrial Average that was introduced in January 1998, closed the year with $459 million in assets.
These products have taken off like bottled water. On the first day of Diamonds trading, 1.7 million shares changed hands, a record volume for a new Amex product launch, exceeding by two-thirds the previous record set by Spiders on that product's launch in 1993. But Diamonds volume hasn't grown at the rate that might have been expected, concedes an Amex spokesman, in part because it has so far attracted fewer institutional players than the S&P-based product.
Amex's MidCap Spiders crossed the $1 billion threshold in assets last October and have been growing steadily. The exchange also launched nine Select Sector Spider Fund shares and their corresponding options last December. In combination with regular Spiders, the products offer investors the ability to customize the S&P weighting in a portfolio, and are thus set to attract retail as well as institutional attention.
Regarding last year's headline merger with Nasdaq, what this means for Amex derivatives business is “a huge boost in resources that has already allowed us to begin reducing costs and extending our technological reach,” notes the spokesman. Amex has leapt ahead in this area with its own on-floor click-trade system that pairs orders, speeds up trading and generates automatic confirms. This spring, Amex will offer customers enhanced electronic access as well as fee discounts based on order size, thus bumping up its competition with the CBOE. Amex also has plans to list a new index share product based on the Nasdaq 100.
| PHILADELPHIA STOCK EXCHANGE |
Last year's volatility in the equity markets ushered in a banner year at the Philadelphia Stock Exchange. A record 34 million options contracts on listed stocks changed hands, a 37 percent increase over 1997 volume, and index options posted a turnover of 3.3 million contracts, up 20 percent from 1997. The PHLX also decided to marry into the Nasdaq-Amex family, which, with technological needs climbing daily, should offer the PHLX a secure technology base.
So what do last year's numbers reveal? Equity and index options have “entered the financial mainstream,” says Jamie Farmer, vice president of business development, and the broker-dealer community has fixed on the retail customer's scent. The PHLX, of course, has benefited from the building interest as well. Last year, it added three new indices to its sector-index product line, bringing the total to 14. The index that made the biggest news splash was TheStreet.com Internet Sector index, codeveloped with the eponymous on-line financial news publication and composed of 20 Internet stocks whose main income streams come from Internet commerce.
The PHLX launched its PC Computer Box Maker Sector index and OTC Prime Sector index in April and June 1998, respectively. The former index tracks IBM, Dell, Compaq, Gateway and other PC makers, while the OTC Prime tracks the 15 most highly capitalized and actively traded Nasdaq stocks. The exchange, which also trades currency pairs, now has an option on the U.S. dollar/euro exchange rate, and is getting set to file for U.S. dollar-settled options on the euro/yen and sterling/euro cross-rate products.
| NEW YORK MERCANTILE EXCHANGE |
The New York Mercantile Exchange is a microcosm of the entire exchange world. Even while trading a record 95 million contracts last year—up from 84 million in 1997—the exchange refused to sit tight. It continued to develop its Access electronic trading system, which paid a good dividend in terms of trading volume: Nearly 1.9 million contracts traded on the system in 1998, vs. 1.2 million in 1997. And, perhaps more important, it set the wheels in motion for several international alliances that, speculates Patrick Thompson, Nymex's president, could produce a “triple-digit increase” in electronic-trading volume this year. If the exchange world of today revolves around cost-cutting, cooperation and connectivity, the Nymex is its poster boy.
Merger discussions with the International Petroleum Exchange are currently underway, and Nymex is readying a far-reaching network of trading alliances in the Asia Pacific region. In addition to rebooting linkages with the Sydney Futures Exchange and the Hong Kong Futures Exchange, Nymex will add Simex and probably the Osaka Mercantile Exchange to the list. The goal is to provide “direct access to our [energy] marketplace by traders in the Asia Pacific region,” says Thompson, “and we think we've now covered the important geographic zones.” Singapore, he notes, is a large physical oil-trading sector; Australia is a major producer and trader; Osaka is where Japan's major trading companies and largest refineries are located; and Hong Kong's financial center offers a potential access point to the developing Chinese market. These alliances, which provide one-way access to Nymex's energy markets, should be in place by June.
Also around June, Nymex is scheduled to roll out its new Middle East crude oil contract, designed to reflect Far East market conditions and pricing, and Access 2000, the second generation of its electronic trading system, which the exchange developed jointly with the IPE even before full-fledged merger discussions got underway. The system should provide cost savings for the exchanges as well as for member firms, since the latter will be able to use just one energy-trading system for their markets. Access 2000, moreover, is designed to run concurrently with open-outcry trading, although different products will trade electronically and on the floor. New products, particularly those established to meet international needs, are likely to be introduced as electronic-only contracts, and certain low-volume contracts that do not warrant the expense of a floor operation may be launched or moved over to screen-trading, according to Thompson.
Beyond developing the overseas marketplace for energy, Nymex has high hopes for the deregulating electricity markets in the United States. The exchange's Cintergy and Entergy contracts, introduced last year, together trade only about 1,000 lots a day, but the exchange has high hopes for its new PJM contract, which goes live this month. The contract is expected to attract much more liquidity, since it covers the largest physical marketplace among U.S. regional delivery points. In addition, despite the flat metals market, Nymex has plans to introduce new domestic and international product lines in copper and aluminum.
These are celebratory times at the Montreal Exchange, which turns 125 this year. Futures on the 10-year Government of Canada Bond (CGB) and the 3-month Canadian Bankers' Acceptance (BAX) note hit record trading levels in 1998: Interest rate futures totaled 8.69 million contracts last year, surpassing 1997 volume by 59 percent.
The swift increase over the last couple years in the ME's two largest fixed-income derivatives contracts can be chalked up to recent Canadian interest rate and dollar volatility. But the ME's aggressive marketing of the BAX and the fact that the product has become the dominant price indicator in the Canadian money market also explain the contract's “record highs,” notes Giovanni Giarrusso, senior executive vice president of markets. The BAX ended the year with 6.8 million contracts turning over, topping 1997 volume by 64 percent; and the CGB traded 1.8 million contracts, a rise of 44 percent. Trading volume as well as open interest on both contracts hit a peak last August, as a result of turmoil in the Canadian dollar and global market volatility. Although options on the BAX and CGB saw slim activity last year, each averaging no more than 1,000 contracts per day, volume shot up to 100,000 contracts between the two on some days last August. Options activity has since slowed, but year-end open interest is up.
On the systems front, the ME last fall decided to use the Paris Bourse's NSC open-architecture platform for overnight European trading. Only the BAX is available on-screen for now, with the exchange averaging about 350 contracts a night in London trading. Like every other exchange, though, the ME, says Giarrusso, is facing pressure to cut operating costs and improve access to its contracts, and will have to reflect on “whether it should keep its floor live, go fully electronic or go side-by-side.” There are advantages to introducing new products and trading low-volume products electronically, he notes, but for the moment the exchange hasn't made a decision about which direction it will take.
For years now, Canada's derivatives markets have been notoriously thin compared with the underlying cash markets. But the Toronto Stock Exchange is trying to change that. Equity options volume increased by about 20 percent in 1998, partly as a result of the exchange's fierce marketing and education campaign, especially to retail investors. And futures on the franchise Toronto 35 index enjoyed a record year, with 440,000 contracts traded, compared with 300,000 in 1997; year-end futures open interest rose 2,000 last year, to 21,000.
According to Stephen Rive, vice president of derivative markets, the biggest goal of late has been to increase the TSE's “derivative liquidity ratio,” which relates index futures trading to activity in the underlying stocks that make up the index, and thus serves as a gauge of derivatives strength. The derivative liquidity ratio improved from 20 percent of underlying in recent years to just under 50 percent in 1998. “We're still lagging [compared with other countries], but we're certainly starting to move up into respectable territory,” says Rive.
To move things along, the TSE will switch to full automation for futures and options in mid-2000. The exchange has chosen the OM Technology platform, so investors will be able to access the markets via a TSE-tailored OM Click workstation or front-end solutions provided by suppliers. The TSE has decided not to introduce electronic trading by first testing the waters with after-hours or side-by-side trading. Instead, there will be a migration plan and “we will move products over in phases,” says Rive. To ensure a competitive focus, the TSE will shift to for-profit status and alter its governance structure. It will likely be the first North American derivatives exchange to take this step.
In the new product arena, the TSE's biggest announcement last year was the agreement it entered into with Standard & Poor's. In mid-1999, the exchange will launch futures and options on the S&P/TSE 60, a new index based on the 60 companies with the largest market capitalizations trading on the TSE. The exchange will then phase out its Toronto 35 futures and options and move trading over to the S&P/TSE 60, which it envisions as Canada's new benchmark equity index. Because the index is broader than the Toronto 35 and offers better tracking with the TSE 300 Composite (the Canadian portfolio benchmark index), it is being pitched as a stronger tool for derivatives players. The S&P name should also help the exchange court the international market. With S&P building a global index that will cover all the equity markets around the world, the new Canadian index will “nest into that global index,” says Rive—meaning that investors managing money globally with the S&P as the overall benchmark are likely to “pick up the 60 as the index to use for Canada.” The TSE will offer Toronto Index Participation Units on the new index, just as it did with the TSE 35 and 100.
Liffe's 1998 loss of its franchise Bund contract to the all-electronic Eurex was the London exchange's grand climacteric. It was a “pretty unwelcome surprise, a wake-up call,” says Hugh Freedberg, Liffe's new chief executive, but “all credit to the people involved in that they didn't behave like rabbits in the headlights of a car. They realized that prompt, urgent and immediate action was necessary and took immediate steps to put that action into effect.”
The Bund migration shook Liffe to its core: Overall volume dropped 7.2 percent for the year. Seeing the exchange gush blood, officials decided to abandon open outcry for screen-only trading, change Liffe's management, and flip from a member-driven organization to a streamlined, “profit-focused commercial business with shareholders.” With Liffe Connect, its new open-architecture electronic trading system, reducing personnel needs, the exchange also decided to cut its staff by 60 percent. Ten percent of the layoffs have already occurred; the rest will take place later in 1999. In this do-or-die transition, experienced locals will have to switch to screen trading, work elsewhere in the industry or find another line of work. Liffe, which is training independent traders to work on-screen, says that 50 percent are now actively using the electronic system. Meanwhile, the exchange notes that 15 software vendors are planning front ends for Liffe Connect.
Liffe's equity options moved on-screen last November—“without glitches or downtime,” says Freedberg. Average daily volume on Liffe Connect was 66 percent higher in January than was pit volume before the launch—a positive sign for an exchange that has not performed as well as other, smaller European rivals, in part because its underlying markets are less transparent. In April, U.K. gilts will move over to Liffe Connect, with index products, the remaining bond market and short-term money-market products shifting over in the summer, and all financial products trading electronically by the end of 1999. Liffe knows it must now hold its ground as the dominant European market for short-term interest rates in order to save face and rebuild its franchise. The exchange is consequently pushing ahead with both Euro-Libor and Euribor futures and options (it began offering Euribor contracts to investors only when EMU took effect on January 4). With approximately 80 percent of the short-term market still in its pocket, Liffe has decided to let the two reference rates compete against one another for benchmark honors—although the exchange's recent announcement that it would allow the conversion of Euro-Libor contracts to Euribor may be a sign of what's to come.
The exchange also recognizes the importance of strategic alliances. No deals have yet been announced, but “all options are open,” says Freedberg, as long as they deliver the “tangible benefits” of product distribution, access to new markets, systems compatibility, and common banking and margin offsets. An alliance, moreover, “doesn't have to be an all-singing, all-dancing corporate finance-engineered joint venture, since those things inevitably take longer and are more complex. What's more important is that we get something practical in place. It's important for the markets and it's important for reaping benefits in the coming year.”
Last year Eurex replaced Liffe as the world's second-largest derivatives exchange by bringing the Bund future home to Germany. Overall, trading volume soared as a result of the Bund plunder, reaching 248 million contracts and surpassing 1997 volume by 63 percent. The Bund traded almost 90 million contracts, the BOBL traded 31.7 million contracts, and the SCHATZ traded 10 million contracts.
Last September, Eurex began listing both Euribor and Euro-Libor contracts, hoping to weaken Liffe's iron grip on the short-term pan-European interest rate market. The Euribor quickly sprang to life. Before the contracts' launch, Eurex had 1 percent of the world's short-term money market business; by the end of January, less than a month after the euro came into its own, it had about 15 percent—the vast majority a result of the Euribor contract. The exchange expects, moreover, that with a consolidated currency platform across Europe, the benchmark interbank reference rate will shift. “The Euribor is the new benchmark...and it is our chance in the market,” says a Eurex spokesman. “It gives us the opportunity to get a bigger part of the cake.” The exchange has been relying on its Bund-tested strategy in this arena, building product volume and liquidity by waiving transaction fees and offering fee discounts on the basis of contract volume.
The German-Swiss exchange is also hoping to build liquidity in what it hopes will be benchmark European sector indexes—the Dow Jones Euro Stoxx 50, which covers euro-currency nations, and Stoxx 50, which comprises stocks across geographical Europe. Eurex commenced Euro Stoxx futures trading last June, with an average daily volume of 2,000–3,000 contracts, and by January had reached 8,000–9,000 contracts per day, although options turnover and Stoxx 50 volumes are significantly smaller.
In an effort to ease capital collateral requirements on institutional investors, Eurex and Matif last year signed a letter of understanding to establish cross margining. Eurex also negotiated a cross-membership alliance with Matif and Monep, the French options exchange, to permit Eurex and Matif/Monep members to become members of the other exchange at half-price. Both initiatives are still mired in inter-exchange red tape. Eurex's big alliance with the CBOT, meanwhile, went down in flames at the last moment when the Board of Trade's membership emphatically rejected Eurex's trading platform, fearing high costs and a loss of independence. The failed alliance puts a dent in Eurex's plan to have its trading platform become the worldwide standard. “We wanted to make one platform with the CBOT—to have two markets on one system with a new front-end API,” says the Eurex spokesman. The exchange is unlikely to sit tight on the alliance front for long, however, since global networking remains “our concept,” according to the spokesman.
For Matif, last year's big events were the decision to automate its markets and the run-up to the euro. The exchange's transition to electronic trading was shockingly swift. On April 7 of last year, Matif began side-by-side trading in interest rate products; three days later, there was negligible trading left in the pit. The volume on interest rate products dropped by about 40 percent over the next few months, while equity products—which had shifted to electronic-only trading—rose by roughly 230 percent. “This was related to the disruption caused by locals leaving the floor, which scared off some customers for months,” says Pascal Samaran, CEO of Matif and Monep. He says the main reason, however, was the dawn of the euro—low volatility on the short end of the yield curve, a reduction in foreign exchange risk starting in spring, and the fact that Matif traded only French short-term rates and therefore couldn't participate in convergence plays. Overall, Matif traded 51.8 million financial contracts in 1998.
Matif last year recast its entire range of yield curve products in an effort to take advantage of the single capital market being formed. It began converting Pibor contracts to Euribor in the fall, and shifted from a French-only family of deliverable bonds to a multi-issuer basket. The 30-Year E-Bond, a three-issuer euro bond comprising German, French and Dutch debt, was launched last September, followed by a two-year note based on French and German paper. Matif will now issue euro-denominated five-year bonds and 10-year Notionnels, also based on Franco-German sovereign debt.
Regarding the interbank reference rate, Matif says it made a clear choice for Euribor “since the beginning” and is ready to take on London. “In the long run,” boasts Samaran, “we hope to be able to take the larger part of the business [from Liffe].” The exchange says it currently has about 15 percent of the short-term interest rate market. (Liffe, Eurex and Matif are not in accord about one another's actual stake in the market.) Matif is also making a play in the European sector index market. It recently switched from quarterly to monthly expiries on the Dow Jones Stoxx 50 and Euro Stoxx 50 in the hope of making the contracts more useful to hedgers. The exchange says it sees 10,000–15,000 trades per day on the Euro Stoxx future and about 5,000 per day on the Stoxx future, and expects volumes to increase.
Finally, Matif is branching out geographically. It shares its Globex network with Meff, the Spanish futures exchange, and Mif, the Italian futures exchange, and has deals with the Merc and Simex—alliances that enlarge the overall Globex universe and “will grant us the biggest distribution network available and the best partner exchanges for short-term interest rates,” says Samaran. “The CME is [already] focused on short-term interest rates, and we believe that CME members, when given an opportunity to trade our Euribor, which they will have shortly...will trade our contracts.” While the addition of the Merc's screens will more than double Matif's 500 active screens, the French futures exchange's target for the end of 1999 is 1,500 screens around the globe. Samaran anticipates that at least one-fifth of Matif's volume will eventually come from the Asian markets.
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