As they attempt to push into the big leagues of finance, Chicago’s futures exchanges are finding that embracing a wider world can create its own set of problems.
For instance, the Chicago Mercantile Exchange’s planned move into U.S. Treasury cash markets could sink a deal with the Chicago Board of Trade to merge trade-clearing systems.
Meantime, the CBOT’s effort to break into cash markets through its Chicago Board Brokerage joint venture faces a legal battle that’s proving to be more threatening than anticipated.
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In courting such troubles, the exchanges have revealed much about their view of the future. Both want to prop up their products by tapping into faster-growing cash and over-the-counter markets.
Doing more to integrate exchange-traded futures with off-exchange markets makes sense. For obvious reasons, the Chicago marts are trying to ensure that big institutions will continue using their financial contracts, instead of seeking cheaper alternatives.
At the heart of their strategy is the fear that Chicago’s top products could become an afterthought–or a mere line on an electronic trading screen–unless the exchanges keep up with the financial times.
Still, taking the initiative is never simple.
Second thoughts?: On its face, the Merc’s deal with Cantor Fitzgerald and Liberty Brokerage has little connection to its tentative pact with the CBOT for merging the clearing systems that match and guarantee trades.
Through Cantor and Liberty, the Merc wants to boost trading opportunities in its flagship Eurodollar pit by providing easy access to cash markets.
Yet by making a deal with Cantor, the Merc has hit a nerve at the Board of Trade on the eve of a crucial common-clearing vote.
Cantor, after all, is planning to launch a computerized futures exchange that will compete with the Board of Trade’s Treasury bond contract.
Giving reasons that to some now appear suspect, the Merc earlier this year refused to join the Board of Trade’s effort to block regulatory approval of the proposed Cantor Financial Futures Exchange.
To Board of Trade cynics, news of the Cantor alliance has proven the Merc can’t be trusted as a partner in common clearing, especially as improvements in electronic trading make it simpler for each exchange to list most of the other’s products.
Merc officials plead innocence. The deal with Cantor “was done in a non-threatening way,” said Chairman Scott Gordon. “There is no reason common clearing will be jeopardized.”
Yet the Board of Trade feels threatened: “The CME’s annnouncement makes the passage of common clearing certainly more difficult,” said CBOT Chairman Patrick Arbor. Board of Trade directors are slated to vote Wednesday on the common-clearing pact.
Square one? The Board of Trade’s fight with Cantor is taking a detour into the Delaware Court of Chancery.
In a hearing that kicked off Monday, Cantor is seeking a court order to block the launch of the CBB cash-market unit, saying the Board of Trade shouldn’t be allowed to use a trading technology developed at Cantor.
Based on a ruling last month that supported Cantor’s position, some insiders say CBB could be sent back to the drawing board. As it stands, CBB has postponed its planned launch date from July 13 to July 31.