Even the staid old exchanges of the past like the New York Stock Exchange (NYSE), Chicago Board of Trade (CBOT), and Chicago Mercantile Exchange (CME) have worked out direct ties to, or strategic alliances with, foreign ex changes. In many cases, these new arrange- ments between exchanges have been sparked by the drive to facilitate expanded electronic trading, which allows traders to trade any fi nan- cial instrument, anywhere in the world, at any time over seam less, electronic global trading platforms.
Just look at a few of the recent new alignments in the exchange world:
• Traditional rivals like the CME and CBOT decided first to both use one clearing organization, then the CME acquired the CBOT in 2007 after a contentious battle in a merger of futures exchange leaders that surprised traders and has been hailed as the deal of the century in the trading world.
• The New York Mercantile Exchange agreed to trade its products electronically on CME’s Globex platform, start- ing with energy and then adding metals when it became obvious that its Comex division was losing precious metals trading share to CBOT’s electronically traded contracts.
With the CME-CBOT merger, the CBOT metals contracts were dropped. This cooperative effort between two formerly highly competitive cities is quite a turnabout from the heated battles of the past.
• The Intercontinental Exchange (ICE), an upstart elec- tronic energy marketplace based near Atlanta, acquired the New York Board of Trade, the last exchange to rely only on open-outcry pit trading, and changed its name to ICE Futures US in 2007. The acquisition produced an instant boost in volume in cotton, sugar, cocoa, and coffee futures when those contracts started trading electroni- cally, and the exchange dropped pit trading altogether at the end of February 2008. ICE also almost pulled off a coup to acquire the CBOT until CBOT members voted to merge with the more established CME, but ICE came back from that setback by acquiring the Winnipeg Commodity Exchange.
• The NYSE and other stock exchanges have taken various routes to move into commodities and futures markets; and futures exchanges have returned the favor by moving into the realm of equities markets and the fixed-income arena that has long been the domain of the over-the-counter mar- ketplace.
T R A D E S E C R E T S
• Many exchange alliances went international in a fren- zied rush to form links with partners in other parts of the world. The NYSE’s high-profile merger with the Paris- based Euronext is only one of many recent agreements by exchanges to expand their business to new territories and new markets.
• Sovereign states have even gotten a piece of the trading action as Middle Eastern countries such as Dubai and Qatar, flush with cash from their oil revenues, went on shopping sprees to purchase large stakes in the Nasdaq Stock Market, London Stock Exchange, and Sweden’s OMX Market in complex arrangements that open up a whole new range of issues related to regulation and secu- rity. It remains to be seen how U.S. and other international exchanges will be able to compete against such oil-rich countries in their efforts to become bigger players on the world stage. Joining the exchange fray in recent years has been a number of new electronic communication networks (ECNs). They have taken a share of trading from tradition- al exchange centers, helped in part in the United States by the March 2007 inauguration of the National Marketing System, which mandated that order flow be directed to the exchange offering the best price for customers. Among these is BATS (an acronym for Better Alternative Trading System) Trading Inc. in Kansas City, Mo., far removed from the financial centers of New York and Chicago. Major brokerage firms and banks such as Merrill Lynch, Morgan Stanley, Credit Suisse, and others own stakes in BATS and
other ECNs as they move to minimize trading costs and compete more aggressively for customers.
• New exchange alliances and efficiencies of electronic trad- ing open the financial markets to a broader audience for new contracts based on markets that were not even envi- sioned just a few years ago—contracts based on carbon emissions and other factors related to global environmental issues like hurricanes, snowfall, and temperatures in major cities; housing futures; new twists for credit derivatives;
and a number of other areas as exchanges devise innova- tive new instruments and ways to manage risk and go head-to-head with the competition provided by over-the- counter arrangements.
These are just some of the developments that are changing the face of the trading industry in the fi rst decade of the 21st century—you almost need a scorecard to keep track of the changes every month. Now both sophisticated traders as well as novices realize that they have to take more interest in looking beyond just one market to the convergence of many related markets, not just geographically but also in product areas, as more attention is focused on risk management on a 24-hour global basis.
It is no longer far-fetched to imagine that some day soon there will be one totally compre hensive electronic global trading network combin- ing major equities and commodity exchanges throughout the world without the turf concerns about where a brick-and-mortar exchange is located. Concepts of “after hours trad ing,” “extended trading,” and
“open outcry” will undoubtedly become historical footnotes to our lexicon, just as the “buggy whip” and the “horseless carriage” were relegated at the dawn of the 20th century.
T R A D E S E C R E T S
Advances in technology and electronic trading will continue the evolu- tion of how trading is conducted and, of course, will infl uence how fi rms and individual traders approach a 24-hour marketplace where literally thousands of fi nancial instruments, including esoteric ones not yet con- ceived, can be traded. Even small institutional trading organizations will need to staff their trading operations around the clock, and many individual traders may suffer from insom nia; they may feel compelled to check their market positions at all hours of the day or night with the concern and worry that there is the potential for some cataclysmic, over- night worldwide meltdown of the fi nancial markets, precipitated by any number of triggering events in today’s post 9/11 world.
With advances in the Internet and personal computer capabilities, the speedup in the dissemination of information will continue to push many traders into adopting shorter-term trading strategies as the con- cept of “buy and hold” as a conservative trading strategy falls by the wayside and is replaced by more aggressive, short-term approaches.
After all, an uptrend is an uptrend; a trend reversal is a trend reversal.
Patterns will repeat themselves, regardless of the timeframe or label that is put on a market, whether it is pork bellies, the S&P 500 Index, the euro, or Intel. The worldwide intermingling of (and blurring of the lines between) equities and futures will continue to accelerate and create new opportunities and challenges for traders.