How electronic trading served as a catalyst in the creation of CME Group
In the late 1980s the futures industry was confronted with a seismic shift – embrace technology or suffer the consequences. The world was becoming a fast-paced global enterprise. Stocks were trading electronically and people began looking to futures to follow suit. But trading futures is more complex than trading stocks, and moving the business into an electronic environment challenged the comparatively primitive technology of that time. It also challenged the trading floor culture of the futures industry, which was particularly strong in the United States, where the industry began.
The futures industry, however, is not known for turning away from challenges. CME took the lead and announced, in 1987, that it was developing the first global electronic futures trading platform.
No one realized this was the beginning of more than a new way to do business. CME Globex and other electronic platforms were initially intended to extend trading hours and provide overnight access to customers in different time zones. But the platforms actually marked the beginning of a futures industry transformation worldwide, and would lead beyond electronic transactions to a wave of exchange mergers and consolidations, including the eventual merger of CME and CBOT, in the notso- distant future.
Exchanges around the world began developing their own systems or collaborating with other exchanges to create shared technology. But it was two new exchanges – the first allelectronic futures exchanges – that opened in Europe and awakened everyone to the power of electronic trading.
The Swiss Options and Financial Futures Exchange (Soffex) launched in 1988, and the Frankfurt- based Deutsche Terminborse (DTB), using Soffex technology, became operational in 1990. These two exchanges merged in 1999 to create Eurex – the first of a string of mergers that continues today.
Soffex and DTB were originally created to link trading customers throughout Switzerland and Germany, respectively. But DTB saw opportunities beyond the nation's borders and began trading internationally in 1995, after a directive of the European monetary union enabled it to do so.
Once its trading screens were in London, DTB/Eurex found a ready audience for its electronic Bund contract, the benchmark German interest rate product. In one of the biggest coups in futures history, Eurex managed in a few short years to capture virtually all the trading of the Bund from the floor of the London International Financial Futures and Options Exchange (LIFFE), where all the product liquidity was located, and the source of LIFFE's bread and butter. By 1997, Eurex had acquired about half of the LIFFE Bund volume and by mid-June, 1998, much to everyone's surprise, virtually all of it. LIFFE had to close its trading floor.
That meant electronic trading was here to stay. It was not somebody's fantasy anymore. It was a method of trading that was being embraced by the marketplace and both CME and CBOT needed to meet that need by providing strong electronic platforms.
At about the same time, futures exchanges had another opportunity to see the power and appeal of electronic trading. In 1997 CME launched its first all-electronic contract – the E-mini S&P 500 – a smaller version of the highly liquid, floortraded S&P 500. It was an immediate success and became the fastest growing product in CME history, along with an additional E-mini on the NASDAQ- 100 index that followed in 1999. Eyes were opened again. Customers not only liked screen trading – they embraced it.
With the futures industry clearly in the midst of profound change, CME launched an intensive study to analyze industry trends and what would be necessary to survive – and thrive – in this changing environment. The findings of the CME board's strategic planning committee, which conducted the study, proved to be prescient.
The report, issued in 1998, said that domestic and foreign futures markets, and futures and other markets, would increasingly seek to integrate operations, driven by three main factors: “advances in technology and communications; the desire to more effectively execute multi-market trades and strategies; and the need to efficiently manage investors' capital and margin resources.”
Exchanges had to find a way to meet the demands of globalized electronic markets, and the report continued:
“Consolidation among exchanges is being driven by the globalization of trading, the need to rationalize the operational and regulatory burdens of the FCMs (futures commission merchants) and the rising cost of building and maintaining separate electronic trading systems – costs which are borne by the end-user.”
The success of electronic trading had shifted customer values from personal relationships to a focus on the highest value, the report also pointed out, and explained that electronic trading also generated a “significantly different cost model than the large open outcry exchanges.”
The future was being written. Joining together in partnerships, alliances and mergers made it possible to share expenses for costly ongoing technical development. So did becoming corporate enterprises, rather than membership organizations, as this created a means of raising capital. Corporate structures were also better suited to competition and the quick decision making required for success in the increasingly competitive futures marketplace.
Shortly after losing the Bund contract to Eurex, LIFFE reinvented itself in 1999 by going all electronic and becoming the first futures exchange to become a publicly traded company. Eleven exchanges followed suit by going public in 2000, including the London Stock Exchange, the Hong Kong Stock Exchange, the Singapore Futures Exchange (after merging with Singapore Stock Exchange to form SGX), and the Sydney Futures Exchange. CME demutualized in 2000 and went public in 2002, while NYMEX converted to a corporate model in 2001, followed by CBOT in 2005.
Both CME and CBOT had weathered the storm of change successfully on their own. But by merging into a combined entity, they have further solidified their leadership role in the industry. The seismic shift has created a new paradigm for futures trading. What lies ahead remains unpredictable, but CME Group will be more than prepared – it will be leading the way.
CME Globex Today – One Global Exchange
The CME Globex platform today is unsurpassed by any other exchange. It offers customers access to the widest array of benchmark futures and options available on any exchange, virtually 24 hours a day – more than any other electronic trading venue. It has a proven record of handling large volume trading days as well as market peaks. At present, the all-time Globex record for handling trades in a single day is more than 14 million contracts, set August 16, 2007. For the full month of August, the platform handled more than 184 million contracts – approximately 176 million futures and 8 million options. Earlier, in February 2007, the CME Globex platform passed the three-billion mark for contracts traded since its launch in 1992.
CME Globex also offers customers a choice of customized low-cost, high-bandwidth connectivity options. CME DIRECTLink, a CME-managed connectivity solution, provides customers with the hardware, back-up connection and circuits required. Client DIRECTLink allows customers to manage their own network connection and equipment. Clients can also access the platform via cost-effective and reliable Internet connectivity. Telecommunications hubs, located in Amsterdam, Dublin, London, Paris, Milan and Singapore, offer global customers improved speed and reduced latency.
The CME Local Network (CME LNet) provides a direct connection to the exchange's fiber optic transport network, providing further reductions in latencies. This innovation, launched in the fourth quarter of 2006, is of particular interest to algorithmic and proprietary trading firms that require speed and reliability in trading transactions, as well as to customers in Asia and Europe. CME currently offers CME LNet connectivity at two colocation facilities.
Trading floors still play a role
Despite the focus on electronic trading, floor trading at CME and CBOT continues to play an important role at both exchanges – accounting for about 25 percent of average daily volume prior to the merger. Today's trading floors are stocked with their own technology. Most traders use handheld computers while also engaging in open outcry trades, data screens are everywhere and the floors overall are plugged in to the electronic markets in every way possible. Floor traders will be served by a consolidated floor in the CBOT building starting in second-quarter 2008.
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