CME Group Migrates Combined CME-CBOT Electronic Trading to a Single Platform
Saving By Consolidating Tech
The massive technology consolidation is occurring at a time when publicly traded stock exchanges are consolidating across the globe to diversify their products into multiple asset classes and drive down technology costs by processing trades on a single platform. In citing reasons for the merger, CME officials said the $11.5 billion deal would position the combined entity to compete with fast-growing global exchanges such as Eurex and NYSE Euronext, as well as the OTC derivatives markets. But successfully pulling off the technology consolidation and realizing potential cost savings certainly are part of the equation.
"One of the reasons they have to do this is they said they're going to get these efficiencies out of the merger," relates Michael Henry, the head of Accenture's financial services strategy practice in North America. "Part of that is technology consolidation."
CME initially said the CME-CBOT combination would result in pre-tax savings of $125 million from administrative and IT costs in the second year after the closing. In May, when the bidding war with ICE heated up and CME was forced to raise its bid from $7.9 billion to $9.2 billion, CME found another $25 million in incremental cost savings, bringing the total cost savings up to $150 million, plus annual savings of approximately $70 million as a result of the accelerated time line.
"There should definitely be cost savings because running one platform is less expensive than running two," says Henry. But, "It has to be flexible enough to handle the diversity of products and robust enough to handle the additional volume," he cautions.
And those volumes, as well as market data rates, will increase further as automated trading strategies grow. According to a December TABB Group report, nearly 50 percent of all futures markets trades in 2007 were transacted through automated trading strategies, including market making and black-box trading. But that figure is expected to climb to 90 percent of total activity by 2010. Today, the CME has algorithmic or automated trading systems executing through Globex, as does the CBOT. "That won't be unusual to us," says CME Group's Kometer. "We have a larger capacity, and I think our performance on Globex will help Board of Trade algorithmic traders."
The End of Pit Trading?
Cost savings also should come from running one combined trading floor instead of operating two trading floors from separate locations. But the consolidation of products onto a single trading floor has created speculation that the era of pit trading is fading.
"The reason they're moving the floor-traded products to CBOT is that CME is going to close its floor," observes William Cline, managing partner at Acai Solutions, a financial services and technology consultancy in New York. Cline believes the move is the beginning of a two-step process to eliminate the floor altogether, beginning with the CME's floor. "They'll close the [remaining] floor once electronic trading gains more of a foothold in their products," he contends. "There'll be too little order flow going to the floor to justify the expense of keeping the floor open." In November, CME Group reported that it trades approximately 13 million contracts a day, with about 2.4 million traded via open-outcry.
In an Aug. 28 update of the trading floor integration, CME said that products with more than 90 percent of liquidity traded electronically could be traded entirely electronically. For example, CME said it was moving one-month Libor futures and Euroyen futures, frozen pork bellies futures, and options and Ethanol futures exclusively to electronic trading. Trading of the major FX products, including the Australian dollar, British Pound, Canadian dollar, Euro and Japanese Yen, will be consolidated into a single trading pit.
Brokerage Customer Savings?
But will the technology consolidation strategy, as well as the downsizing of 380 employees across both exchanges, lead to cost savings for the CME's and CBOT's brokerage customers?
"There's cost savings on the exchange's side as well as on the customer's side," explains CME Group's Kometer. "Their systems will be talking to one exchange's systems versus two," he adds, allowing customers to consolidate redundant systems as well. And in addition to migrating the matching platforms, the order-entry and market data feeds also will go to Globex, Kometer notes. "We are moving matching, market data and order entry toward the Globex system, and so all the Board of Trade systems that were doing the same thing are being retired," he says. "All eCBOT data will be coming out of our Market Data Platform [MDP]."
Since futures brokers will have a single connection to both exchanges, PFGBEST.com's Wassendorf says, the merger of CME and CBOT trading platforms could cut the connectivity bill in half. "The connectivity charge -- a fixed expense per month -- over time will definitely become one of our big savings," he says.
"The more you can simplify these platforms," the lower the costs will be, adds Accenture's Henry. If CME can consolidate the trading platforms down to one, it will set itself apart from other exchanges, such as NYSE Euronext, which still is running four platforms: NYSE Hybrid, Archipelago, NSC and LiffeConnect, he notes.
But PFGBEST.com's Wassendorf maintains that CME cost savings and efficiencies won't materialize until the end of 2008 or early 2009. "Any changes, any development, any new and improved [feature] is not going to improve costs [right away]," he asserts, pointing out that the big expenses in IT are new integration and development, and testing and connectivity changes. But, "At some point in time, those cost savings would take affect." he says.
Meanwhile, member firms would like to see the CME lower some of its fees, notes Wassendorf. "The CME has to make a commitment not to charge for electronically traded quotes," he insists. CME differentiates between electronically traded quotes disseminated through Globex versus market data viewed on quote terminals -- CME provides free access to quotes if firms are trading on Globex, but charges if the quotes are viewed on a market data terminal, explains Wassendorf.
Wassendorf notes that CME waived the fee for electronically traded quotes, which has increased the volume and transparency for those products. "It's no coincidence that increased transparency and efficient pricing are related to the huge volume that you see on electronic trading on Globex," he says. "If they hurt that by raising prices or charging for the market data, you'll see a competitor move in."
According to Wassendorf, Eurex and NYSE Euronext are among the CME competitors that would like to get into the U.S. futures market. "If the CME makes a mistake, you'll see another exchange step in," he says.
Competition is another reason CME is moving CBOT off LiffeConnect to consolidate the exchanges' platforms on Globex, Accenture's Henry suggests. CME "is not going to want to pay revenue to a competitor," he asserts. "There's no way the CME is going to pay royalties to NYSE Euronext," the owner of Euronext Liffe, which licenses LiffeConnect to CBOT.
Meanwhile, there is speculation that cash-rich CME Group will acquire other exchanges. PFGBEST.com's Wassendorf says the CME "can become a big acquisition machine and buy other exchanges" around the world as long as there aren't any antitrust issues.
Accenture's Henry says the current technology project could position CME to make future deals. "To the extent that they can do a merger like this and migrate all these products over smoothly, this would be a huge plus," says the consultant. "If they can demonstrate that they merged all of CBOT's products within three months [of closing the deal] as opposed to somebody else that hasn't done it before or has done it badly, that would be a big difference."
Tweet This