Global exchange operators are bumping elbows as a lull in
consolidation helps drive a fresh focus on product development,
leading some derivatives bourses to set up shop in competitors'
backyards.
A surge in new products spanning everything from emerging
markets indexes to European potatoes comes as the global futures
industry endures a slump in trading volume.
This makes it tougher than ever to build liquidity in fledgling
markets and match the historical nine out of 10 failure rate in new
product launches.
"Everybody's scrambling to get in everybody else's turf," said
Thomas Caldwell, chairman of Caldwell Investment Management Ltd.
and a veteran exchange investor.
"We've gone the first round of mergers ... the dance is starting
to slow down and the exchanges need new product ranges. That's the
stage we're at."
He said the spate of new futures contracts bring far more
overlap than usual in an asset class where many exchange operators
have long enjoyed natural monopolies.
The precious-metals sector offers a good example. The three
largest global futures exchanges - CME Group Inc. (CME), Deutsche
Boerse's (DB1.XE) Eurex arm and NYSE Euronext's (NYX) Liffe - are
all competing in the space for the first time.
NYSE Liffe is expanding its equity index futures lineup to
compete with similar products on other exchanges, and Eurex is
pushing into agricultural commodities, a market fragmented in
Europe and dominated by CME and IntercontinentalExchange Inc. (ICE)
in the U.S.
The focus on product development comes amid the ongoing shift of
over-the-counter derivatives to exchange-backed clearinghouses in a
regulator-driven effort to reduce counterparty risk, and follows a
wave of exchange consolidation that crested prior to last fall's
meltdown in financial markets.
"Everyone is looking for something new to trade," said Herbie
Skeete, managing director of London-based exchange consultancy
Mondo Visione.
"The derivatives space is driven by relentless product
development, and a very high percentage [of new contracts] fail,
but when you have a winner, you make the money."
Business As Usual?
CME chief executive Craig Donohue is not so sure anything has
changed.
He points to past competition between the Chicago Board of Trade
and the New York Mercantile Exchange in metals - both now absorbed
into CME, with the CBOT metals line sold off to NYSE Euronext.
Donohue also cites the success of ICE in bringing competition to
crude oil futures, and past attempts by Eurex to crack CME's hold
on Treasury and Eurodollar futures.
In a message that will find favor with U.S. regulators that have
cleared recent industry consolidation, Donohue said no market is
off limits.
"The barriers to entry are low," he said. "It's indicative of a
healthy, competitive market."
Garry Jones, global head of derivatives at NYSE Euronext, said
the climate is good for challenging dominant competitors.
"The market likes to support duopolies when it can," Jones said.
"If you stop competing every time someone has a head start, you're
not going to get so far."
Unseating dominant rivals won't be easy. CME, for one, has faced
down multiple assaults on its supremacy in U.S. interest rate
futures; this month will bring the launch of ELX Futures, a
bank-backed electronic exchange intended to siphon away some of
CME's Treasury futures business.
Elsewhere, various attempts to float a third benchmark contract
for crude oil have failed to gain much traction.
"It's extremely difficult to knock off a derivatives or
commodities market," said Caldwell, of Caldwell Investment
Management. "Maybe they see vulnerabilities, but it's an uphill
fight."
Eurex, looking to develop nascent agricultural markets in Europe
as it competes against CME and NYSE Liffe for precious-metals
trade, is fighting a two-front battle brought on by customer demand
and "opportunistic" moves, according to Brendan Bradley, global
head of product strategy for the exchange.
Europe constitutes the world's largest gold market, with
benchmarks in London and an over-the-counter market that's several
times as large as the exchange-traded segment, Bradley said, and
recent counterparty credit concerns have investors looking to
direct more precious-metals trade to exchanges.
Separately, Bradley said the struggles of Germany-based RMX Risk
Management Exchange to maintain trading volume in its farm futures
opened the way for Eurex, co-owned by Deutsche Boerse and SWX Swiss
Exchange, to take on the contracts.
Bradley acknowledged that agricultural commodities historically
have been weak markets for Europe due to the European Union's
farm-subsidy arrangements, but Eurex sees localized potential that
could grow.
"None of these will be products that will take off tomorrow,"
said Eurex's Bradley. "But in the long-term strategic view, as the
market develops, we hope to develop with it."
Caldwell said success will come down to systems speed, economies
of scale and more than a little luck.
"That's what businesses do," he said. "They try new things, and
if it doesn't work, they move on."
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com