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CME Starts Side by Side Trading

Chicago Mercantile Exchange Inc (CME) is continuing its technology strategy with two new initiatives. The first of these is the creation of a virtual private network (VPN) to allow access to the Globex2 trading platform via the Internet in the US. The second offering is electronic trading of its currency and cross-rate futures contracts, which will run in tandem with traditional open-out-cry trading.

The exchange is currently beta testing Globex2 online through a VPN. The testing is being carried out on an open, phased test period. “The profile in the first phase is the individual trader at home in the US who has one workstation and a 56k modem,” says Kathy Doherty, associate director for Globex services. “Because this is relatively new technology for CME, we need to get our feet wet before we try it out with bigger players. For the next phase, we will be looking at how the VPN is working for the individual at home, and if we’re satisfied with those results, we’ll expand the trial.”

Doherty has no official timeframe in place for the results as yet, saying that its expansion will be dependent on an ongoing review of the results.

In order to access the VPN, the user will go to CME’s website to download client software, which then provides the user with what Doherty calls “a secure tunnel”. Once that link is established, the user goes to another website to download the front-end that allows them to trade. This set-up enables the exchange to provide access to CME products using existing Internet technology.

The site is being managed by Genuity, a company that attracted the

exchange, according to Doherty, because of its reputation in the market-place and close fit with CME’s needs. CME is currently working with about 10 beta production sites and expects an official production date of 1 March. Access will cost $400 per month, $200 for the software access and $200 for the connectivity fee. The monthly fee within the US for use of a Globex2 terminal with a 56k modem is currently $1,400.


SIDE-BY-SIDE TRADING

One month later, on 2 April, CME is due to introduce electronic trading of its currency and cross-rate futures contracts. The addition is intended to run “side-by-side” with floor trading, rather than replace it. CME has pledged to keep its pits open as long as they retain at least 40% of the aver-age quarterly volumes from 1999, although its demutualisation document provides it with “the option” to close the pits if usage falls below this level. Side-by-side trading has been introduced at London’s Liffe and France’s Matif, both of which have since closed their trading pits in favour of electronic trading.

The electronic operation will allow ‘round the clock access, with a half-hour break each day for settlement. Most CME currencies can currently be traded electronically only after-hours on the Globex2 system, from 2:30 pm to 7:05 am (US Central Time).The currency futures will be completely fungible on a 1:1 basis with pit-traded contracts, enabling each con-tract to settle daily to the same price whether traded via open outcry or electronically. The Merc currently has two E-mini currencies that both trade “virtually” around the clock, adds an official, along with the Deutsche mark, which trades electronically.

In order to ensure that traders will have access to the electronically traded contracts, CME is increasing the number of Globex2 terminals available in the currency pit. Coupled with this, it is providing additional Galax-C handheld units to traders who want to access Globex2 from the trading pits, so traders in the pit can access both the electronic and floor pools of liquidity.

“Many active participants in our markets have told us clearly that they want the ability to trade our currency products electronically,” says Jim McNulty, CME’s president and CEO. “We anticipate that, combined with the open access to our Globex2 system that we implemented last year, electronic currency futures – with the transparency, efficiency and fairness of CME markets – will attract new customers to CME currency futures markets.”

“Currency derivatives have evolved substantially since 1972,” adds CME chairman Scott Gordon. “We anticipate that, combined with the open access to our Globex2 system that we implemented last year, electronic currency futures – with the transparency, efficiency and fairness of CME markets – will attract new customers to CME currency futures markets.”

The move follows CME’s expansion of direct electronic access for all customers to products traded on Globex2, abolishing the limitations on customer access to bids and offers and eliminating the restrictions on the number of Globex2 workstations that members and customers can have.

These technological innovations, particularly when combined with the demutualisation process, come at a price. The exchange’s 2000 results showed an operating loss of $5.9 million (?5.35 million) in comparison with 1999’s net income of $2.7 million (?2.45 million).

This reversal in operating revenue does not seem to have deterred the exchange, with McNulty saying, “In 2001, we will focus on product development, improvements to our electronic and floor based trading technologies, and continued re-engineering of our processes to capture cost efficiencies for the exchange and our customers. We are pursuing a growth strategy through expansion of our Globex2 distribution network, electronic listing of new and existing CME products – such as chemicals and foreign exchange – and the introduction of single-stock futures. In addition, we have begun providing clearing and infrastructure services to new and traditional marketplaces.”

The loss came at the same time as the CME enjoyed a record annual volume of 231.1 million contracts and witnessed Globex2 usage rising 114% to 15% of total exchange volume. This suggests that the strategy may be productive in the long term, once the non-recurring expenses conclude.

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