CME Group Inc. is the latest exchange to face competition from its main customers, large investment banks and active-trading firms that want to set up a rival market.
Using the name Four Seasons which, its planned, will trade U.S. Treasuries futures at first the new effort is one of several new futures and securities markets that U.S. and European financial firms are readying to offset the dominance of major exchange groups.
It is impossible to say whether the new derivatives exchange, planned to be launched this year, will be successful, because of a regulatory environment that does not foster competition, unlike for U.S. securities.
Exchanges are trying to become brokers, and brokers are becoming exchanges, said Chris Prior-Willeard, vice president of innovation at the depository receipts division of The Bank of New York Mellon Corp., in London. BNY Mellon has $1 trillion in assets under management.
Mr. Prior-Willeard also said the new markets could develop specific models that would support specific niche strategies.
But with competition comes market fragmentation, which makes it more difficult for investors to execute large orders.
There is so much liquidity in the futures markets that its going to take more than two or even three exchanges to really create a fragmentation problem, said Kevin McPartland, senior analyst at the consultancy TABB Group, New York, noting that competition in securities yielded much lower fees, the potential for rebates and sub-millisecond execution. If implemented correctly, this new market and the participants using it will reap similar benefits that have long avoided futures trading.
Investors seem to agree that competition might be a real threat to an established exchanged. The stock of CME Group, for instance, hit a high of $714.48 on Dec. 10, before the Four Seasons project was announced. CME stock suffered a steep decline to $485.25 on Feb. 6 amid concern about heightened competition and has not yet recovered; the stock was trading around $510 a share at midday on Feb. 29.
Although swaying liquidity from one market to another, financial firms have invested in a number of projects. Heres a list of newer entrants and the brokers behind each organization that plan to take on the exchanges.
•BATS Trading Inc., Kansas City, Mo.; electronic communications network; launched; U.S. stock exchange status pending.
Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Inc., Lime Brokerage LLC, Merrill Lynch & Co., Morgan Stanley, GETCO LLC, Wedbush Morgan Securities, Credit Suisse Group, Deutsche Bank AG.
•BIDS Trading LP, New York; U.S. block-trading platform; launched; joint-venture project with NYSE Euronext pending.
Bank of America Corp., Bear Stearns Cos., Citigroup, Goldman Sachs Group Inc., JPMorgan Chase, Knight Capital Group Inc., Lehman Brothers, Merrill Lynch, Morgan Stanley, Credit Suisse, UBS AG, Deutsche Bank.
•Markit BOAT , London; European trade reporting platform, launched.
BOAT was sold in January to Markit Group Ltd. by its founders: Citigroup, Goldman Sachs, Merrill Lynch, Morgan Stanley, Credit Suisse, UBS, Deutsche Bank, HSBC Holdings PLC. (Markit Group is also owned by a group of brokers.)
•Turquoise, London; European equity trading platform; launch planned for mid-2008.
Citigroup, Goldman Sachs, Merrill Lynch, Morgan Stanley, BNP Paribas SA, Societe Generale SA, Credit Suisse, UBS, Deutsche Bank.
•Four Seasons, New York; U.S. futures exchange; development stage.
Bank of America, Citigroup, eSpeed Inc., JPMorgan Chase, Merrill Lynch, Citadel Investment Group LLC, GETCO, PEAK6 Investments LP, Barclays Bank PLC, Credit Suisse, Deutsche Bank, Royal Bank of Scotland Group PLC.
•Project Rainbow, London; European futures exchange, initial planning stage.
Goldman Sachs, JPMorgan Chase, Lehman Brothers, Citadel, Credit Suisse, UBS.