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12:06 PM
Robert Sales
Robert Sales
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Euronext/LIFFE Union Certain to Shake Up Derivatives Industry

Euronext/Liffe Union Certain to Shake Up the Derivatives Industry.

By the end of 2001, when the shareholders of the London International Financial Futures and Options Exchange (LIFFE) are expected to give their official approval to Euronext's takeover of the London-derivatives market, the worldwide futures' landscape will be significantly altered. The combination of LIFFE and the pan-European Euronext -- which owns and operates a group of cash and derivatives exchanges, spread across Paris, Amsterdam and Brussels -- will create the largest futures exchange, volume-wise, on the planet. But it also could provide LIFFE with the capital, resources and technology know-how to quickly establish Nasdaq LIFFE Markets (NQLX) -- its soon-to-be-launched joint venture with the Nasdaq Stock Market -- as the single-stock futures (SSF) market to beat.

Moreover, via its decision to adopt London's trading engine as the standard for all of its combined derivatives markets, Euronext and LIFFE will bestow upon LIFFE Connect the unofficial title of the world's premier derivatives-trading engine. Euronext has, in fact, had very good success selling its NSC trading engine to derivatives and stock markets across the globe. LIFFE Connect, however, has won plaudits for helping quickly transform LIFFE from an open-outcry-driven market to an all-electronic exchange. And after the Euronext deal is completed, LIFFE Connect will, for the first time, establish a significant presence in markets outside of London.

Ultimately, after LIFFE Connect proves itself in Euronext's derivatives markets, Euronext will likely convert the trading engine for its cash markets, in place of NSC, says an executive at a software vendor that has built interfaces to both NSC and LIFFE Connect.

"The LIFFE Connect engine can certainly be made to handle cash. That's not really a challenge for a derivatives matching engine," says the source. "NSC has been successful, but consolidation makes sense. The LIFFE Connect platform is a newer architecture ... and it's proving to be scalable."

Even if Euronext does not adopt LIFFE Connect for its cash markets, its decision to go with London's trading engine for its derivatives market may force the Chicago Mercantile -- the most high-profile client of NSC -- to re-evaluate its incumbent electronic-trading engine. A few years back, as part of a much ballyhooed technology swap, the Merc agreed to install NSC as the trading-engine component of its so-called Globex2 electronic-trading platform. In turn, Euronext, then known as the Paris-based Matif SA, agreed to adopt the CME's Clearing 21 clearing system.

Though Globex2 has proven quite successful, especially in terms of handling the Merc's electronically-traded e-mini products, one high-ranking official at the CME says Euronext's decision to employ LIFFE Connect for its derivatives markets has definitely caused the exchange to take a closer look at its NSC-driven trading engine. The official, however, declines to provide any other insights on the CME's trading-engine strategy.

In addition to playing a pivotal role in the Euronext-LIFFE marriage, LIFFE Connect will also have a prominent part in the development of the NQLX -- the for-profit, all-electronic SSF exchange which is now scheduled to make its debut in the United States in April 2002. 50 percent owned by Nasdaq and 50 percent owned by LIFFE, NQLX expects to initially list between 50 and 75 SSF contracts via LIFFE Connect -- which will essentially serve as a central-limit-order book for buy and sell orders that come into the system.

With the backing of Euronext, LIFFE, which already trades more than 50 SSF contracts in its home market, is very confident that it can establish NQLX as the leader of the SSF pack in the United States. It will, however, face some stiff competition from the American Stock Exchange and OneChicago -- an SSF joint venture comprised of the CME, Chicago Board Options Exchange and Chicago Board of Trade.

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