When it comes to surviving as an exchange, the name of the game is technology.
Representatives of exchanges in Europe and the United States say their business plans include purchasing electronic systems designed to link them to other exchanges and to traders around the world. And while differing in their methods, the exchanges are striving for the same result: to remain competitive in a marketplace where state-of-the-art systems can turn into relics in a day.
"Technology has hastened the pace of change," said George Anagnos, executive vice president at the London International Financial Futures and Options Exchange, addressing the Futures Industry Association's Futures and Options Expo in Chicago last month. "We need to be nimble to evolve and stay competitive."
In 1998, after the launch of the all-electronic German-Swiss exchange Eurex, LIFFE saw its trading volume decline 30%. Included in the losses was the lucrative German government bond contract, the bund, which had traded on the LIFFE for years but bolted to Eurex's more modern platform.
LIFFE's trading figures are on the rebound this year, due in no small part to its conversion to an electronic exchange. Nov. 24 was the last day for pit trading at LIFFE. During the year, the exchange systematically moved its financial and commodities trading to its electronic platform, LIFFE Connect.
Single stock futures
In January, LIFFE plans to start trading single stock futures, a move that may draw business away from the United States. Exchanges here cannot trade such futures, although a bill passed in October by the U.S. House of Representatives would change that. A Senate version of the bill has yet to make it to the floor, and no action is expected this year.
Still more technological innovations may be on the way now that LIFFE's shareholders have approved a plan to sell 7.7 million new ordinary shares to Battery Ventures, Boston; The Blackstone Group, New York; and other smaller investors. Shares will sell for L6 ($4.24) each and are expected to raise L57 million. In return, Battery Ventures and The Blackstone Group will get a significant minority equity stake in LIFFE and buy them seats on LIFFE's board of directors.
"The money will allow LIFFE to pursue technological ventures," Mr. Anagnos said. "In the next six months, we hope to make LIFFE Connect, a trading engine that handles LIFFE products and can handle products in regulated and unregulated markets in Europe, the U.S. and the Far East."
But competition already is stiff. The all-electronic Eurex seems to announce new products every week. Officials there recently announced the development of weather indexes based on data collected from 30 European cities by the German Meteorological Service. Eventually, the indexes will serve as the basis for new derivatives products for sectors that rise and fall depending on the weather. In December, Eurex plans to launch electricity indexes that will measure price developments on the spot market. They are designed to make the electricity trading market more transparent. Currently 29 traders from six countries trade 100,000-megawatt hours of electricity on the exchange each week.
Eurex needs more
Heike Eckert, head of marketing and sales for Eurex Frankfurt AG, told futures and options expo attendees that even with the exchange's current offerings, it needs more to remain competitive with LIFFE Connect, U.S. exchanges that are increasingly turning to electronic trading and new players in the electronic exchange market. At some point, Eurex will start exploring opportunities to partner with electronic communications networks, traditionally thought to compete with exchanges. ECNs are online trading systems that enable shares to be traded outside an exchange.
What about U.S. exchanges?
Mary McDonnell, vice president and managing director of the Chicago Board of Trade/Eurex alliance, said she believes the CBOT/Eurex alliance; the development of CBOT Direct, a new screen-based trading platform; and expanding CBOT's product line hold the keys to the exchange's future. "We hope single stock futures come to fruition quickly," she said at the expo. "If not, we will look at other options for expanding our equity product line."
The Chicago Mercantile Exchange is slimming down and toning up to keep up with the breakneck pace of technological change in futures exchanges. The CME recently completed its transformation from not-for-profit member organization to for-profit stock corporation. Members are now shareholders, and the number of decision-making committees, for everything from responding to competition to setting membership dues, has been cut dramatically, from more than 200 to around a dozen.
CME officials hope less bureaucracy will improve and hasten decision-making, raise cash for technology investments and help the exchange focus on its customers, rather than its members, said Craig Donohue, managing director for business development and corporate/legal affairs at the CME. He said traditional exchanges, far from being dinosaurs, offer an important service that new electronic exchanges still need: clearing services.