This is not merely the third attempt by Lutnick to try and break the CME and Chicago's dominance of US Treasury futures, but is one of a series of attempts by various players to do so, starting with Eurex, the derivatives arm of Deutsche Borse, as far back as 2002. Eurex launched Eurex US in Chicago that year in a bid to wrest market share in US Treasury futures from the then-Chicago Board of Trade (later acquired by the Chicago Mercantile Exchange, now part of CME Group). Now, as then, I think this latest attempt will ultimately likely fail to win meaningful market share, for two reasons: 1. It's all but impossible to shift liquidity in a futures contract from the incumbent because it means shifting open interest at the clearing house of the exchange where such contracts are traded. This is costly and a monumental pain for banks and other market participants. 2. The futures markets are regulated by the CFTC, which long ago together with the Department of Justice effectively blessed the "vertical silo" model of the exchange business, under which one business controls both the trading and clearing of a futures contract - making if very hard for open interest to shift from an upstart's clearing house (in Lutnick's case LCH.Clearnet, owned by LSEG (London Stock Exchange Group) elsewhere - as Eurex US found. It is this model that has allowed CME to build its dominance of US Treasury futures. Such dominance has always meant having a level of monopolistic pricing power that users of US Treasury futures - including the very banks that have swung behind Lutnick's venture - hate. And so, from time to time, they team up and back a disruptor to try to keep an incumbent exchange honest and force its prices down by applying the hot breath of competition. The same thing happened in equities trading in London when bank-owned trading platforms Chi-X and Turquoise launched to challenge the dominance of the London Stock Exchange after Mifid was enacted 15 years ago. Chi-X disappeared, while the LSE bought out the banks behind Turquoise and simply absorbed it into its own market infrastructure - although, notably, both platforms did succeed in causing the LSE to lower its prices for a time. So, we've seen this movie before, many times. Including Electronic Liquidity Exchange (ELX), backed by Citigroup, JPMorgan, Merrill Lynch, hedge fund Citadel and Peak6, a proprietary trading firm, attempting the same manoeuvre against Chicago in 2008. Then there was BrokerTec. Now part of the CME. Much ink will no doubt be spilled on this in coming months but at the end of the day, this is what this is all about: forcing an incumbent's prices down. Will that work? Let's see. BGC Group Goldman Sachs Citadel Securities #futures #Chicago #competition
Thomas Krabbe
2mo
Great summary Jeremy Grant! I think the ultimate benefits to the futures industry are innovation and lower fees, even though the challenger may fail at the end. Eurex US lead to a massive reduction of CBoTs trading fees, forced CBoT to move US treasuries clearing to CME, which created huge efficiencies across interest rate curve. Maybe FMX/LCH has some cool product ideas from a combination IR of futures and swaps or -as you predict- "just" puts pricing pressure on the incumbent? Let's see, competition is good and market participants will benefit at the end. Last but not least, I hope this challenge will be good for Chicago and Frankfurt as center of excellence for anything related to futures & options trading/clearing.
Judith Hardt
2mo
Very interesting Jeremy !
Non-Executive Director and Law Consultant
2moGreat summmary of the history Jeremy Grant. It is extraordinarily difficult to attract liquidity to a new futures contract - as even CME Group /its constituent platforms have found when launching head to head against others (like #NYMEX versus #IPE (now ICE FUTURES EUROPE) in the noughties in respect of Brent crude). As you know, the lesson you explain has been demonstrated in the energy/environment trading markets as much as in equities/financial futures