CHICAGO BOARD BRACES FOR CANTOR BLITZKRIEG: CYBER-TRADING PLAN THREATENS DOMINANCE IN TREASURY FUTURES

After 150 years in business, the Chicago Board of Trade has the fight of its life on its hands.

From the upper echelons of global trading firms to the traders in the pits, there is a growing awareness that New York-based Cantor Fitzgerald LP, the nation’s largest cash dealer for government bonds, is mounting a serious challenge to the Board of Trade’s dominance over bond futures.

“We’re a loyal Chicago Board of Trade member firm, but the fact of the matter is, if (Cantor) can build a better mousetrap, they’ll get the business,” says Jim McCormick, president and CEO of Chicago-based TransMarket Group LLC, a large clearing firm that is active in Treasury futures, the board’s mainstay business.

“It’s real simple,” he adds. “If we can make money (on the Cantor system), we’ll use it. If we can make a lot of money doing it, we’ll use it a lot.”

Promising sharply lower trading fees, longer trading hours and a large base of customers who already trade in both the cash and futures markets, Cantor has teamed up with two New York futures exchanges to offer computer-based trading of contracts, using thousands of terminals already installed for Cantor’s computer-based cash trading system.

‘staggeringly cheap’

“The marginal cost of our doing this is nothing,” says Howard Lutnick, Cantor’s president and CEO. Thus, trading fees “will be staggeringly cheap.” Regulatory approval is expected in a few weeks and trading should start by early summer.

Exchange leaders have not missed the danger looming for contracts that account for well more than half the board’s volume.

“I don’t want to be referred to as the captain of the Titanic,” says board chairman Patrick Arbor. “This is our first real competitive threat.”

Cantor officials have refused to disclose their fees, but Chicago traders expect something in the range of 25 cents or less per contract, compared with the board’s $1 or more for non-members. Members pay far less — which is why a full board membership last traded at $780,000 — but Cantor is offering free 18-month memberships to get its system rolling.

“They (Cantor) asked us what would be compelling,” says Tom Rubio, trading manager for Chicago’s Rosenthal Collins Group LP. “We said a dime to 20 cents, and they said that would be easily within range.”

In addition, the Cantor system’s transaction fees should help establish a market; only the party that accepts an offer to buy or sell will pay. At the board, both the buyer and seller pay transaction fees.

The threat posed by Cantor, as well as other by low-cost electronic exchanges overseas, was the main force behind a recent agreement to reduce costs by consolidating the back-office trade-clearing operations of the board and the Chicago Mercantile Exchange.

The result of Cantor’s challenge could be plummeting seat prices, a total merger of Chicago’s exchanges and the conversion of open-outcry pit trading — and the thousands of jobs that entails — to a roomful of computers.

The board is taking on Cantor head-on by starting its own computerized system for trading bonds in the cash market. That system eventually will have side-by-side electronic display of bond futures prices, but only in the off-peak hours when the exchange’s Project A computer system is active.

The board’s best hope is that the established liquidity of its open-outcry pits will prevail if Cantor’s electronic market doesn’t have the ability to handle large trades or its posted prices are higher for buyers and lower for sellers than prices in the pits.

little means a lot

Even the smallest possible difference — $31.25 per $100,000 worth of bonds — would easily outweigh any savings on transaction fees that Cantor could offer, especially for large traders that already pay relatively low transaction fees at the board.

The entire landscape changed last year when the all-electronic German futures exchange Deutsche Terminbourse started trading German bond futures and took away an established open-outcry market at the London International Financial Futures Exchange.

“They lost it in four to five months,” says Mr. Arbor. “It was like a blitzkrieg.”

While electronic trading has proved itself in low-volume markets, the conventional wisdom is that only the pits could handle large trades.

“DTB has been a shock to people, because size does trade” electronically, says TransMarket’s Mr. McCormick. “The liquidity of the screen can match that of the pit.”

Crain News Service