globalexch

Issue #44

Last Update March 2, 2006

Finance The Future of Markets by Gerry Krownstein Several announcements made at the Futures Industry Association's annual conference in Boca Raton this month paint a picture of the shape that commodities and interest rate trading will take in years to come. The main trends are clear: electronic markets will continue to grow, and eventually may replace face-to-face trading on exchange floors; marketplaces will become more international in their ownership, the products traded, and their membership; national regulatory bodies will need to coordinate regulations with their foreign counterparts; and the process of breaking down national boundaries that communications and computer technology has made possible will accelerate.

The announcements are these: Eurex, the electronic exchange based in Frankfort that specializes in Euro-denominated derivative instruments has received regulatory approval to open a US futures market and has begun trading of US treasury futures, cleared by the Clearing Corporation of Chicago; Euronext-LIFFE, an amalgamation of European and UK markets, has begun trading Eurodollar derivatives on LIFFE-Connect, an electronic trading system that is also used by the CBOT; The London Clearing House Ltd and Clearnet S.A. have agreed to merge, forming the largest Central Counterparty Clearing House (CCP) in Europe, to be called LCH.Clearnet; the Chicago Mercantile Exchange has signed an agreement with the Shanghai Futures Exchange permitting the Shanghai exchange to use CME's SPAN system for calculating portfolio risk, has agreed to join Tullet Liberty Inc. in providing an electronic trade-matching capability for over the counter interest rate markets, and has launched enhanced Eurodollar options trading on Globex, its electronic trading arm.

All of these developments provide internationally accessibility to a common trading platform. In most cases, trading hours reflect the global marketplace, extending to as long as seventeen hours per day. Electronic trading means that price transparency and speed of execution is the same no matter where the trader is located or what company he or she is trading and clearing through. When the regulatory issues are finally resolved, a trader in Tokyo will be able to make a trade on a Frankfort exchange, clear it in Chicago, and use that position to offset positions he made in the US, freeing capital for additional trading. Traders will no longer have to wait for exchanges to open in order to act on late-breaking news; trading will be possible at any time in any time zone. American traders will have easy access to Euro-denominated contracts, and European traders will have easy access to dollar-denominated contracts.

Financial markets, which have always been international in concept but local in execution, administration and regulation, are discovering what consumer-oriented companies have realized for several years: boundaries are gone and will not return. Just as an American consumer can go to the internet to buy books from the UK, pharmaceuticals from Canada and electronics from Japan regardless of whether these products have been released in the American market, investors will be able to manage investments efficiently regardless of country of origin, in whatever currency is most advantageous, and move capital to the investor's advantage. International law and regulatory agencies have not quite kept up with the latest developments, but international cooperation is increasing and, over the next decade, the framework that is being built now will come to maturity.