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