The world’s largest derivatives exchange said it will leap the Atlantic to compete directly with the Chicago Board of Trade and the Chicago Mercantile Exchange beginning next year.
Eurex, which has grown to dominate futures trading in Europe, could represent significant competition for the CBOT and the Merc if it is able to win over traders.
In response, the Board of Trade has moved to sever a business deal with Eurex. The CBOT announced it would drop the electronic trading system it had shared with Eurex and adopt the Liffe Connect system used by Euronext.liffe, Europe’s second-largest derivatives exchange and a Eurex competitor.
Eurex spokesman Uwe Velten said his exchange decided to sever its relationship with the CBOT to pursue its ambition of a U.S.-regulated derivatives exchange trading futures in equities, indexes and interest rates.
“We will start [trading] in early 2004,” Velten said.
He said that CBOT electronic traders can continue to use Eurex’s a/c/e system, adding, “no one needs to upgrade”–a factor likely to encourage CBOT traders to at least experiment with Eurex.
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Velten would not rule out the possibility that the new exchange will later add single-stock futures and other products.
The move by Eurex was evidently not a complete surprise for the Board of Trade, which had been looking at adopting a new electronic trading platform since mid-2002.
“We probably would have made this announcement regardless,” said David Prosperi, a spokesman for the exchange.
Traders interested in using both exchanges will need to have both systems, adding a measure of complication. But Prosperi said he doesn’t think many in the futures business will migrate to the Eurex exchange.
“I think it is going to be difficult for them to compete in the U.S.,” he said. “It’s going to boil down to who has the most liquid system.”
Eurex has been a success in Europe, however. The exchange boasts that under its leadership the European market in bond futures rose from 35 percent of the volume of the U.S. market in 1997 to 170 percent by the end of last year.
The CBOT said Liffe Connect is an appealing system, in part because it can support complex trading strategies, will reduce the potential for mistrades and processes 99.9 percent of all orders in under half a second.
Switching systems may help speed the Board of Trade’s transition from open-outcry trading to mostly electronic transactions, said Chris Derossi, chief executive of Trading Technologies International Inc.
The Euronext.liffe system offers more features than the Eurex, such as the ability to simultaneously buy and sell contracts for delivery in different months, a strategy known as spread trading, said Derossi, whose company makes software that connects traders to both trading platforms.
“It’s a more mature, sophisticated platform,” he said. “It supports a robust set of trades that can’t be done on the a/c/e.”