Why Can't We All Just Get along? Cross-Border Alliances among Exchanges, Clearinghouses and Regulators Have Turned the Concept of Competition on Its Head and Enabled Even the Lowliest of Us to Act like Global Hedge Funds. but All of It Could Hit the Skids Unless Someone Figures out How to Adequately Compensate Technology Providers

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"We need to stop beating the hell out of each other," says Robert Ray, senior VP in charge of business development for the Chicago Board of Trade (CBOT). "We need to stop trying to take markets away from each other and instead focus on helping end users access each other's liquidity pools--so I should be able to access Eurex's, and they should be able to access ours!"

He points to the CBOT's sub-licensing of its LiffeConnect access to the Winnipeg Commodity Exchange, the Minneapolis Grain Exchange, and the Kansas City Board of Trade last December as an example of how we can all get along. "Now you have the four largest grain exchanges in North America running on one platform," he says. "All price data go through the CBOT's quote vendor network, and every technology upgrade is replicated simultaneously across all exchanges, bringing down technology costs and adding efficiencies to the market. The organizational value is incalculable."

A year ago, you could have dismissed such talk as the hypocritical pontification of a weak player invoking higher principles. But now that Eurex US has arrived in Chicago and captured an anemic 2% of the CBOT's U.S. Treasury volume, the comment makes us wonder whether the primary question raised in last year's "Trader's View of the World" has been answered both in the abstract and the specific.

Back then, we focused on cross-border alliances and competition among exchanges in different countries by examining the way amalgamated liquidity pools like the OMX-centered cluster of Scandinavian exchanges cooperate internally but compete externally. But the big question was: would Eurex US' entry into Chicago (and, for that matter, Euronext.Liffe's launch of Eurodollar futures in London) simply force domestic U.S. exchanges to get themselves up to speed technologically and organizationally, or would someone actually manage to take liquidity away from a competitor.


Largely because the Chicago exchanges kept Eurex US at bay long enough to get themselves up to speed, the newcomer has failed to make more than a scratch in the CBOT's heady U.S. Treasury volumes, and Euronext.Liffe's "successful" London-based Eurodollar contract (with open interest approaching 200,000) has been little more than a nuisance to the Chicago Mercantile Exchange's (CME) flagship product. But Christopher Morris, who runs U.K.-based brokerage Saxon Financials, says the answer goes deeper than that, "Only a structural shift, like floors to screens, can shift a contract from one liquidity pool to another," he explains.

In Ray's paradigm, the "customer" is anyone from a supplier to an end user, and any service that allows brokers to free up resources while accessing multiple liquidity pools represents competitive advantage.

To be fair, Eurex boss Rudi Ferscha always insisted his U.S. venture was more about bringing the world to Chicago and catering to the global trader than it was about taking volume away from the CBOT, while Euronext.Liffe has made an art out of assimilating rather than obliterating competitors, and mutual offset agreements among exchanges date back to the 1980s. But none of those co-operating entities competed in the same territory for the same customer. The new ones often do.

Take the Tokyo Commodities Exchange (Tocom). With everyone focusing on the New York Mercantile Exchange's (Nymex) foray into London and its head-to-head battle with the International petroleum Exchange (see "The race to build a global oil exchange," page 14), many have overlooked that Nymex is cooperating with Tocom to market Nymex products in Japan. The deal comes as Tocom has tripled its foreign participation after launching an internet trading system. Although the lion's share of Tocom's non-Japanese customers are Australian, Tocom has applied to the Commodity Futures Trading Commission for permission to market its gold, silver, platinum, crude oil, gasoline, kerosene and rubber contracts in the United States after Japan's Financial Services Agency granted Nymex and the IPE the right to market their products in Japan. …