By Stuart Nickless

The success and long-term future of Liffe are still far from assured, but the recent alliance with the Chicago Mercantile Exchange strengthens the London exchange’s hand considerably. Who will benefit the most in the alliance, of course, remains to be seen. Market participants are generally optimistic about Liffe’s future, but that confidence sometimes slips a little. Expectations also vary with regard to the success of the Liffe Connect electronic trading platform. It has crashed a couple of times (most recently on Friday, August 13), causing more than a little inconvenience and expense to users.

Peter Lovell, manager of electronic markets at futures broker GNI, is confident that Liffe Connect is a good enough platform to run the Liffe market and also handle activity generated by the link-up with the Merc. “The technology Liffe is using is far ahead of any of the other exchanges, which means that its scalability is enhanced,” he notes. “In my experience, most electronic platforms have significant teething problems, but hopefully most of these have already been sorted out and the join-up with the Merc will be fairly smooth.”

The crucial test will be the success of the short-term interest rate futures (STIRs) contracts, which went live on Liffe Connect on August 23. The contracts are critical to the future of Liffe Connect and Liffe itself because the large number of pre-recognized trading strategies involved in these contracts constitute the most complex challenge for the platform to date. If it doesn’t work, STIRs and the huge volume of trades they generate could be lost. A senior developer at an independent software vendor who has been involved in implementing STIRs in his company’s trading interface is confident, however. “We’ve done some extensive testing and it looks okay to us,” he says. “We were pushing some extremely heavy volume and it functioned perfectly well.”

“The technology Liffe is using is far ahead of any of the other exchanges, which means that its scalability is enhanced.”

It will have to continue functioning well. Dealers haven’t forgotten what happened to the Bund. One dealer pointed out that “Eurex wasted no time grabbing the Bund. If Liffe isn’t right on top of the STIRs from the word go, any technological screw-ups will see the business snatched from under it, leaving it well and truly beached.”

The collective wisdom seems to be that the merger with the Merc and the expanded use of Liffe Connect is a good thing. Tom Theys, managing director of PAT Systems, is upbeat about the linkage. “Now that Liffe is going into STIRs, there couldn’t be a better alliance than with the Merc, which has traditionally been at the short end of the exchange market,” he says. “Politically and strategically, it’s a good move.” A huge potential advantage is the ability to spread trade between Liffe and Merc STIR contracts, which could boost volume significantly. Theys thinks another big advantage for Liffe will be its ability to continue to use technology it has already developed, rather than start from scratch with somebody else’s.

A senior staffer at a Liffe clearing member firm, however, offered a dissenting view. “The tie-up will be of much more help to the Merc than Liffe, because it means the Merc will be able to develop an electronic trading system that actually works much more quickly and relatively inexpensively,” he notes. “Liffe’s performance has been lackluster recently, with unimpressive volumes. It may survive, but whether it will ever again have the critical mass to enable it to compete with Eurex is very much open to question.”

Overall, the Liffe-Merc alliance is expected to be successful, but political battles will need to be fought before it’s finalized. A lot of pride will have to be swallowed by both sets of members. Merc members will have to accept that the system they have already developed is the wrong platform and that they spent a lot of money unnecessarily, while Liffe members have to accept that, having developed a platform, they are going to hand it over to somebody else.

The bottom line is simple: As long as Liffe Connect works and STIRs trade successfully, there won’t be a problem. In the electronic marketplace, users have become far less brand-sensitive. If the trading mechanism is reliable and provides access to good liquidity, the badge on the grille hardly gets a glance.

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