Conditions Are Ripe for a CME Competitor
McPartland says that the timing could be right for an electronic exchange to go up against the CME and succeed. "It's a much different environment now -- the world is very accepting of electronic trading, and that in and of itself makes this a much more viable possibility," he says, referring to past attempts to launch an electronic futures market to compete with the CME, such as Eurex's effort in 2003. Stressing that increased adoption of electronic trading makes the field riper for competition, McPartland points out that the CME conducted about 75 percent of its trading electronically in the second quarter of 2007, compared to only 12 percent in 2000.
"There is no question that futures volumes have been exploding," adds McPartland. "Which means there is room for competition."
Although not directly involved with the Four Seasons project, Andrew Yao, head of Advanced Execution Services (AES) futures sales at Credit Suisse, agrees. "Traditional managers have a bigger mandate to use more derivatives, and the volumes are growing all around," he says.
"This could take the CME out of being a monopoly and give clients choice, and any time clients have choice, that's a good thing," Yao continues. "Pricing power not concentrated in a single entity is a good thing and benefits our clients."
Ultimately, pricing will be the key to the proposed exchange's success, says TABB's McPartland. "The trading fees will be a big help to draw in liquidity and incentivize traders to move positions," he says.
"It's going to shake things up," Credit Suisse's Yao says, adding, "I'm assuming they would go after the CME's biggest contracts to begin with."
But while the competition would be good for the industry, Yao is quick to point out that the new exchange hasn't secured any liquidity yet. "Clients will gravitate toward something with liquidity. Having a maker versus taker and the rebate model could be interesting," he comments. But, "If clients don't want to direct business to the exchange, then there's not much we can do."
Another factor will be clearing. "The new exchange will need a way to clear -- either through an agreement with another big clearing firm or by creating their own," says TABB's McPartland. "There are benefits to both of these options, but while its quicker to work with an existing clearing firm, they wouldn't have as much control over pricing and fees than if they created their own."
Creating a clearing firm, however, would, of course, mean a lengthier regulatory process that may or may not be in the exchange's plans. While reports claim the new exchange will launch in the first quarter of 2008, no official date has been made public.
It seems only time will tell how the Four Seasons initiative will take shape. Even Yao says, "There are still a lot of details to be sorted out, and that will take time."
From his perspective, TABB's McPartland says, it's hard to imagine that the new exchange could go live until 2009. "It depends on how far along they are on the regulatory side, and that will determine how long it will take them to go live," he says.