US Futures Markets: The Chicago Trifecta

June 29, 2004

Abstract

New York, NY, USA June 29, 2004

Celent Communications asserts that the competition between the Chicago futures exchanges is not a fight over market share of certain products, but a fight to remain viable in the overall marketplace.

When Eurex AG announced it would launch a US exchange to trade CBOT-flagship Treasury products, industry spectators feverishly debated the future of the dominant futures markets. Would the all-electronic newcomer steal liquidity from the traditional trading floors operated by the incumbents? How would the Chicago exchanges fight back? But the debate has primarily focused on issues of market share and liquidity as the barometers of success.

In a new report, " ," Celent reviews the three Chicago-based futures markets: Chicago Board of Trade, Chicago Mercantile Exchange, and Eurex US. The report analyzes the business strategies of these exchanges and finds that the incumbent markets have successfully changed the game from one based on market share to based on ultimate survival and relevance in the wider futures marketplace.

The report examines the evolution of these three exchanges. The on-again/off-again relationships of the various players in the US futures markets, including the clearing houses, are described. The report briefly describes CBOT痴 and CME痴 trading environments, including the transition toward electronic trading, and the changes to their business strategies in response to the threat from Eurex US. Their respective financial positions are analyzed. The Eurex US market structure is described in greater detail, including a discussion of the issues raised during its approval process.

Celent predicts that Eurex US will likely fail to attract the necessary liquidity to topple CBOT as the dominant market for Treasuries. However, Eurex US痴 single remaining weapon is the global clearing link it envisions between Eurex Clearing and the Clearing Corporation.

Regardless of the survival of Eurex US, CBOT and CME have successfully altered their business strategies, and changed the game from one based on market share to one based on ancillary yet crucial services. These markets have moved upstream to areas of the trading life cycle that are much less likely to be replicated, and, like so many other aspects of trading, commoditized.

According to Jodi Burns, the report痴 author, "Even if the Eurex US market does not survive, its importance in the futures markets should not be undervalued. Without the entrance of Eurex US, CME and CBOT would not have been as motivated to meet the demands of their members (e.g., fungibility) and would not have changed their old business strategies. These changes have improved the quality of the US futures markets, and for that, the US owes a debt of gratitude to Eurex. This is the perfect example of the benefits of competition."

The 49-page report contains 13 figures.

A

Table of contents is available online.

of Celent Communications' Institutional Securities & Investments research service can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.

        

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Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

 

New York, NY, USA June 29, 2004

Return to report Abstract

 

EXECUTIVE SUMMARY 3
INTRODUCTION 5
OVERVIEW OF FUTURES MARKETS 7
RELATIONSHIPS 11
CHICAGO BOARD OF TRADE 17
  Overview 17
  Trading: Electronic and Floor-Based 17
  Closing the Trading Pits 21
  The Outsourcing Model 22
  Financials 22
  CBOT Strikes Back 25
  Changing the Game 27
CHICAGO MERCANTILE EXCHANGE 29
  Overview 29
  Electronic Trading  30
  Financials 32
  New Competitors 34
  Changing the Game 34
EUREX US 36
  Overview 36
  CFTC Approval Process 37
  Trading Volumes 39
  Strengths 40
  Challenges for Eurex 41
  The Decision to Launch? 42
  The Future of Eurex US? 43
CONCLUSION 44
APPENDIX 46
OBJECTIVITY & METHODOLOGY 48

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