Traditional exchanges and their new competitors are looking more and more alike.

For years, while electronic trading was slowly gathering steam, the world's future and options exchanges sounded the advantages of open outcry and resisted electronic trading, new ownership structures and—frankly—change of almost any sort.

Now they understand it's their game to lose. Faced with bright-eyed and aggressive entrants into the field and the reality of lower transaction fees, greater trading efficiencies and more transparent markets, the exchanges are scrambling to turn over crisp new leaves and keep their customers content. Liffe, which almost had itself cashiered a couple of years ago when Eurex bulldozed its core interest rate business, is now splitting into two for-profit entities—a derivatives exchange and an e-commerce platform that will pursue new financial and nonfinancial business-to-business opportunities, using, ironically, Liffe Connect, the technology platform that served as the exchange's own antidote to an exceedingly grim fate.

The Chicago Board of Trade, which hemmed and hawed its way around a joint venture with Eurex with great public drama and angry politicking in Chicago, is now onboard Eurex's technology platform and singing hosannas to the beauty of global product distribution. (It, too, will split in two, with the prospect of an IPO for its electronic half down the road.) Cooperative alliances, cross-margining programs and demutualizations are in the works at other exchanges. Eurex, meanwhile, is heading toward Internet access for members. At the same time, Cantor Exchange, the new International Securities Exchange and the fresh-as-corn FutureCom commodity exchange are bent on siphoning off some of the liquidity and depth in the listed markets through the efficiencies of electronic and (in the case of FutureCom) Internet trading.

What follows is a quick run-down on what's up with various e-commerce and electronic initiatives at some of these futures and options exchanges.

Eurex

Eurex, the largest exchange in the world in trading volume, turned over 380 million contracts in 1999. The twin pillars of its winning strategy: low transaction fees and easy access. There are 430 market participants (more than 60 percent outside Switzerland and Germany) now trading at the all-electronic Frankfurt, Germany-based exchange, and Eurex has extended its reach through a joint venture with the Chicago Board of Trade to access products on a single screen.

When the shared-technology platform goes live in mid-2000, members of both exchanges will be able to trade products via the same front end, computer and network. For now, though, there's no cross-membership arrangement, so firms must be card-carrying members at both shops. "Between Eurex and the Board of Trade, we have a large number of benchmark products,” notes a Eurex spokesman. "Together, we trade about 60 percent of the futures business in world, and we set a benchmark in futures and option trading with our state-of-the-art system.” Eurex will add its first screens in Japan this summer and is committed to having an Asian partner aboard the alliance bandwagon probably by the end of the year, further expanding the platform's product range and distribution across the Asian, European and American time zones.

In the fourth quarter of this year, the exchange will also take a giant step forward by offering Internet access to its trading system. Member firms on the Eurex–CBOT platform will then have the option of trading contracts over the Eurex network, via a data provider or on the Internet.

CME

For the last couple of years, the Chicago Mercantile Exchange has diligently pursued a two-pronged approach to the slippery issue of open-outcry trading vs. electronic trading. "We've provided not only a state-of-the-art electronic trading system, but the horsepower to take on our bigger contracts if and when the marketplace decides that electronic is the way it wants to go,” says an exchange spokesman. At the same time, the exchange has provided pit traders with hand-held electronic devices and order-routing technologies to streamline and enhance floor trading.

"We've provided the horsepower to take on our bigger contracts if and when the marketplace decides that electronic is the way it wants to go.” —CME official

Although the Merc offers side-by-side trading, eurodollar futures are still traded almost entirely open outcry during the day. The exchange, however, has expanded its global electronic reach by forging alliances through Globex2 with the ParisBourse, Singapore Exchange, Montreal Exchange and the BM&F, the Brazilian futures exchange. Last August, the Merc also inked a large-scale partnership deal with Liffe to provide mutual access to one another's products and cross-margining between Liffe's one-month and three-month Euribor contracts and the Merc's eurodollar stalwart. The latter went live for members of both exchanges earlier this month.

The Merc's e-mini history, meanwhile, has been a tale of serial boom contracts, with the e-mini Standard & Poor's 500 the exchange's third-most-actively-traded futures product. The e-mini Nasdaq 100 hasn't seen volume accumulate at nearly the same pace, but 380,000 contracts per month isn't peanuts. Last month, the Merc also launched an e-mini lean hog contract—the first agricultural commodity to be offered electronically as well as in an e-mini dose.

CBOE

The Chicago Board Options Exchange is the world's largest equity options mart. To buttress its kingpin status, the exchange has cut fees to member firms over the last year and is developing a screen-based trading system that, says an exchange spokesman, could be integrated with open outcry to form a hybrid trading framework.

Building toward that eventuality, the exchange crossed the threshold into the 21st century sporting what it refers to as a "blended open-outcry system.” More than 90 percent of orders received are now held on electronic order books, traded by pit traders and reported back to firms electronically. And volume on the exchange's Retail Automatic Execution System doubled over the last three years, with 35 percent of small-order business now executed efficiently and cleanly—that is, with no human intervention.

But there are challengers to the throne. How does the exchange view the upstart all-electronic International Securities Exchange, for instance? "Competition is good,” says the CBOE official. "The ISE is certainly another entrant into the arena of options trading, but it's simply the first up to bat.” The Chicago exchange's plan: To continue to aggressively ensure its attractiveness to member firms and market-makers. The exchange has already cut costs and slimmed transaction fees over the last year, and in mid-1999 went through a reorganization to give itself additional flexibility. The exchange's liquidity isn't likely to move elsewhere too rapidly, but there are few people willing to bet on exactly where the horizon will be sitting a year from now.

CBOT

After a great deal of turmoil and future-plans mayhem over the last year, the Chicago Board of Trade has decided to get in bed with Eurex and divide itself into two for-profit companies, one for open outcry and the other focusing on electronic trading and e-commerce, pending approval by the exchange's membership this spring.

"We're basically betting the ranch on this alliance platform and the whole philosophy of having one face to the marketplace.” —Dennis Collins CBOT

Right now, 95 percent of the CBOT's volume is still in open outcry, although electronic trading has been doubling every year. "We're basically betting the ranch on this alliance platform and the whole philosophy of having one face to the marketplace,” acknowledges Dennis Collins, vice president of marketing programs at the exchange. "Trading seems to pick up when a trader has a terminal on his desk and can see the market moving—and doesn't have to pick up the phone to enter an order.” So exactly why is the Eurex technology platform so attractive? Simple: It's much better than Project A at enabling more people to access the markets more easily.

First on the Board of Trade's to-do list: get all products traded electronically switched over to the alliance platform. Once that happens, tentatively by mid-summer, "the market will see an incredibly aggressive approach to satisfying customer demand,” predicts Collins. The two exchanges will look into complementary products that can be pitched to global investors. In addition, he notes, as the financial services industry becomes more and more commoditized, the joint venture will face new opportunities and "the exchanges will not restrict their product offerings or business scope to strictly futures and options as we've known them in the past.”

Liffe

In the futures world, Liffe is the phoenix resurrected. After its near-death experience when Eurex kicked into high gear in 1998, Liffe restructured, demutualized and began the difficult switch from open-outcry pits to a fully automated exchange. The last two areas that remain to be transferred to electronic trading are financial options and, later this year, commodities.

"We're not going to pretend that liffe connect makes everything well with the world and that we can just go back to being an exchange.” —Dan Casey Liffe

Liffe says it expects to break even fairly soon, after a huge financial investment in Liffe Connect. "But we're not simply going to wait around and pretend that, now that we have Liffe Connect, everything is well with the world and we can just go back to being an exchange,” says Dan Casey, managing director of marketing and development. Liffe's game plan: To split into two for-profit companies, one that will operate as a regulated derivatives exchange and the other as a business-to-business exchange in the unregulated (and not necessarily financial) markets. The latter company, which will include Liffe Connect, could potentially enter into agreements with competitors to Liffe to license the Liffe Connect electronic trading platform.

Liffe's attitude toward electronic trading: It has found religion. "You think you've got your head around what's possible because you're electronic, until new things just keep occurring to you,” says Casey. "What counts is not only the technology, but the underlying business relationships that could be developed with different entities.” The exchange believes its key asset is its electronic platform, which could help other exchanges requiring low barriers to entry to list their products electronically. The platform's ability to handle short-term interest rates and the complex strategies applied to those products suggest that Liffe is (finally) the proud parent of a stress-tested and proven engine.

The Neo-Exchanges

ISE

Clearly, the International Securities Exchange is the new kid on the block, albeit one with stellar parentage (see Page 32). Formed in 1997, and with the financial backing of Adirondack Trading Partners, a consortium of large U.S. broker-dealers, the for-profit ISE will throw open its door—er, screens—late next month as the first new U.S. options exchange to be approved by the Securities and Exchange Commission since 1973. Its plan is to eventually trade a slate of options on 600 securities, although it will inch into the water with an initial offering of 30 options.

The ISE's electronic trading system will preserve traditional auction market principles via a central market-maker function to ensure market depth and order flow. (The exchange will be owned by its two tiers of primary and competitive market-makers.) ISE technology will dynamically reprice options as the underlying securities shimmy up or down, and in an effort to increase transparency in the markets, the exchange will publish not only consolidated quotes but the volume bid and offered on its system. The exchange will also preserve anonymity on trades and will offer a single order book for customers and institutional member firms. All this, it hopes, will generate enough juice to tear a good-sized chunk of the options business away from the behemoth Chicago Board Options Exchange. Moreover, if the open-outcry pits wither, or at least cease to be the only game in town, floor traders who've always dreamt of working in an upstairs dealing room will have a place to send their resumes.

Cantor exchange

The Cantor Exchange, a joint venture between eSpeed, a technology subsidiary of bond broker Cantor Fitzgerald, and the New York Board of Trade, has faced its share of critics and skepticism over the last couple of years as it tried to pry the open-outcry lid off the Treasury futures market with electronic trading. The battle to entice flow away from the gargantuan Chicago Board of Trade continues, but the CX has recently come out with a few efforts that may now win itself some admirers. In February, the exchange rolled out the first cross-margining program between U.S. Treasuries and related futures products, and it's now addressing execution risk in the Treasury market through a new futures block-trading facility approved by the Commodity Futures Trading Commission in February.

The CX uses eSpeed technology to give futures commission merchants access to the exchange from their desktop, through a direct link to the exchange. (The CX still has hopes that eSpeed will pull day traders into the futures market.) The exchange utilizes an interactive matching technology that gives the first best bidder the chance to execute more trades once the bid is hit. Through competitive pricing and low transaction fees, and by rewarding liquidity providers, the CX intends to sink its teeth into a meatier portion of futures trading. In the increasingly important government agencies business, it plans to leverage eSpeed's large cash agency brokerage facility through its electronic offering of agency futures. The exchange won't be feasting on too much of the CBOT's business anytime soon, but the benefits of on-line trading will likely be felt more keenly in the coming months.

Futurecom

Last month, FutureCom commodity exchange, owned by the Texas Beef Group, became the first Internet-based exchange to be approved by the Commodity Futures Trading Commission. Its first contract to go live, probably this summer: futures on live cattle. The electronic exchange based in Amarillo, Texas, is now looking at a cash-settled corn contract, additional cattle contracts and futures on boxed beef products likely to appeal to retail stores interested in forward buying ground beef or loins. But the exchange may well take a turn toward financial futures or the commodities markets in coming months, says chairman Bill O'Brien, possibly even offering products that aren't traded today, such as airwave frequencies.

"The most overlooked aspect of electronic trading is the important link between physical trading exchanges on the internet and futures trading exchanges on the internet.” —Bill O'brien Futurecom

FutureCom plans to attract traders by offering lower transaction costs than open-outcry exchanges, a more competitive delivery system and transparent markets. Not only would traders be able to watch market orders fill before their eyes, but having an accessible, electronic market could throw the doors to the market wide open. "By using the Internet and our electronic trading platform, we're going to broaden the markets and create a new base of customers who need the derivatives markets but have never participated in them before,” says O'Brien. Commodity funds, for example, might now consider trading in the spot month since FutureCom's cash-settled contract would eliminate the possibility that they might have to (inconveniently) take delivery of a herd of cattle.

The new exchange also plans to connect electronically with physical cattle and grain-feed trading sites to deepen liquidity and create efficiencies in the marketplace. "The most overlooked aspect of electronic trading is the important link between physical trading exchanges on the Internet and futures trading exchanges on the Internet,” notes O'Brien. FutureCom will handle the back-office operations for futures contracts electronically, and trades will settle and clear electronically. Membership in FutureCom is free.