By Alexander Osipovich and Gunjan Banerji
The world's largest exchange company launched bitcoin futures on
Sunday, seeking to capitalize on the mania for the booming digital
currency.
Chicago-based CME Group Inc. began trading bitcoin futures at 6
p.m. Eastern Time. The first contract for January expiration surged
nearly 6% to $20,650 in the first trade but dropped to $18,760
after several hours of trading.
Bitcoin itself tumbled after the futures began trading. At about
9 p.m. Eastern Time, it was at $18,576.53, according to CoinDesk,
after having approached the $20,000 mark earlier Sunday.
CME's launch came one week after its smaller rival, Cboe Global
Markets Inc., launched a similar contract. Cboe's futures sputtered
in their initial week, creating an opening for CME.
Bitcoin has soared around 1,800% this year -- an extraordinary
run-up that has lured investors world-wide. Futures on bitcoin
allow traders to bet on whether its price will rise or fall, and
they offer Wall Street firms a way to trade it on well-known,
regulated markets.
Volumes on Cboe's bitcoin futures have dropped off precipitously
since Dec. 11. After more than 4,100 contracts changed hands on the
first day of trading, volume averaged around 1,640 contracts the
rest of the week -- a 60% slide. Cboe said its volumes are healthy
for a brand-new product and expects them to pick up.
CME's launch went more smoothly in the early hours of trading
than Cboe's, said Bobby Cho, head of over-the-counter trading at
Cumberland, the cryptocurrency unit of Chicago trading firm DRW
Holdings LLC.
Mr. Cho noted there was less of a gap between the price of CME's
futures and the price of bitcoin, which indicated there were more
big traders ironing out anomalies between the two markets. The
spread between CME's main January contract and the CoinDesk price
of bitcoin narrowed from more than $1,200 to less than $400 in the
first two hours of trading.
"It definitely felt like there were more market participants
ready for the CME launch than there were for Cboe," Mr. Cho
said.
Compared with Cboe's bitcoin futures, CME's offering may appeal
more to hedge funds and big financial firms and less to retail
investors, some traders said. That is because of its larger size;
each CME contract represents five bitcoins, whereas Cboe's
represents just one. That means it will require more cash upfront
to trade the CME contract.
But CME still faces many of the same hurdles as Cboe, including
a reluctance by many banks and futures brokerages to touch the
notoriously volatile cryptocurrency.
Conceived as a purely digital currency not backed by any
government, bitcoin has gone from a curiosity beloved by
libertarians and software geeks to a mainstream investing fad. But
skeptics call it a bubble, and its reputation remains clouded by
its association with money laundering and other illicit
activity.
CME's heft and close ties to big trading firms could give it an
edge over Cboe. But some of the largest banks and brokerages won't
be providing their customers with access to CME's bitcoin futures,
potentially putting a damper on trading activity.
JPMorgan Chase & Co., Royal Bank of Canada, Société Générale
SA and UBS Group AG didn't plan to offer their customers access to
CME bitcoin futures initially, although they are monitoring the
situation and could rethink their stance later, people familiar
with the situation said. The same banks sat on the sidelines for
Cboe's launch, according to the people.
All of them are so-called "clearing firms" at CME, meaning that
they sit between the exchange and traders and help move cash from
market participants with losing bets to those whose bets pay off.
Bitcoin futures are risky for clearing firms because the extreme
volatility of the cryptocurrency increases the odds of traders
being unable to cover their losses. If that happens, the clearing
firm itself can suffer losses.
"A lot of clearing firms were very nervous about this launch.
They throttled back the risk quite a bit," said Joe Van Hecke, a
trader at Grace Hall Trading.
Goldman Sachs Group Inc. and ABN Amro Group are clearing both
CME and Cboe bitcoin futures but only for certain clients,
representatives of the banks said.
Interactive Brokers Group Inc., a clearing firm and online
brokerage, is offering access to both CME and Cboe bitcoin futures.
In a disclosure form, it warns customers that trading bitcoin
futures is "especially risky" and "there may be no fundamental or
economic basis for valuation of Bitcoins and their prices may move
randomly."
Popular retail brokerages Charles Schwab Corp. and TD Ameritrade
Holding Corp. said they were studying CME's bitcoin futures but
wouldn't be allowing customers to trade them at launch. TD
Ameritrade will enable trading of Cboe's futures starting Monday, a
spokeswoman said.
Ally Invest, the online brokerage arm of Ally Financial Inc.,
said earlier this month that it would give its customers access to
CME bitcoin futures "on day one," but on Thursday, an Ally
spokeswoman said the firm was evaluating the situation and "cannot
confirm the timing of availability to our customers."
A CME spokeswoman said a number of trading firms were ready to
support its new bitcoin futures at launch.
Bitcoin's price swings led CME to rein in the riskiness of its
new contract. Last Tuesday, citing a "normal review of market
volatility," CME raised the so-called "initial margin" requirement
for its bitcoin futures to as much as 47% of the value of a
contract for speculative traders, from 35% earlier.
That means such traders will need to deposit cash worth nearly
half the value of the contract to place bets, effectively limiting
the size of the bets they can place. By comparison, initial margin
for CME's main oil futures contract is about 4%.
CME Group grew out of the famed Chicago Mercantile Exchange,
which was founded in 1898 as the Chicago Butter and Egg Board. It
now spans the globe and runs a broad array of markets in areas such
as energy, metals and stock-market futures.
Meanwhile, Cboe, which runs the biggest U.S. options platform
and started in 1973, has exclusive rights to key stock and
equity-volatility contracts.
Only one of the two firms will end up with the dominant bitcoin
futures market, due to the winner-takes-all nature of the futures
business, market observers say.
"History tells us that the market will gravitate to one
exchange," said James Angel, a finance professor at Georgetown
University. "Whichever contract achieves critical mass will
dominate the other one."
Alison Sider and Emily Glazer contributed to this article.
Write to Alexander Osipovich at alexander.osipovich@dowjones.com
and Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
December 17, 2017 21:47 ET (02:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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