Swiss technology takes on Chicago’s pit bulls

Are the days of hand signals on the trading floor numbered? Keystone Archive

Some sophisticated Swiss technology is set to shake up the global derivatives market as the world’s biggest player, Eurex, started trading in Chicago.

Eurex, a joint venture of the Swiss and German stock exchanges, is homing in on a market that has not been easy to enter but which is seen as holding great potential.

After overcoming a number of hurdles from competitors since applying last September to put its foot in the door, Eurex finally won approval from the United States Commodity Futures Trading Commission (CFTC).

It started trading on Sunday on its new all-electronic US exchange, Eurex US.

The move is being seen as a symbolic battle between the Chicago exchanges, which invented futures more than a century ago, and the Europeans, who believe they are true innovators for the future.

Analysts say that Eurex US’s appearance could hasten the day when electronic trading finally kills off the “trading pits” system, where traders communicate using hand signals and shouting.

Eurex’s bid to enter the US market was fiercely contested by supporters of the trading pit, but free-marketers lauded its arrival because it brings more competition to the world’s largest futures exchange.

Swiss know-how

“Swiss know-how is certainly in the technology,” said Daniel Gisler, a member of the Frankfurt-based Eurex management executive board.

“The birth of our system goes back to 1987 when SOFFEX [Swiss Options and Financial Futures Exchange] was founded and was basically the first electronic exchange and integrated clearing house.

“Obviously over the years it has been modernised, but from a functional perspective or basic idea, it is that know-how in our systems,” he told swissinfo.

The traditional US futures exchanges, which operate both online platforms and floors where traders meet to do business, are facing tough competition from purely electronic exchanges in Europe that want to make trading truly global.

“It is our idea to create a global market place which combines European markets, European products and European participants with the US market, US products and US participants,” Gisler explained.

“We believe we bring a new perspective into the existing markets which are still concentrated on a continental basis.”

Going global

“We believe that this will be the next paradigm shift, where the markets will really go global and this will first happen in the derivatives industry. We think we will be very well positioned with that,” Gisler said.

Initially, Eurex US will offer trading in futures and options on two-, five- and ten-year Treasury notes and on 30-year Treasury bonds. All Eurex US products will be cleared by The Clearing Corporation in Chicago.

These products are identical to those traded at the major competitor, the Chicago Board of Trade. Treasury bond contracts are key to CBOT’s business, accounting for more than half of its transactions.

CBOT has reacted to the European threat by cutting is fees for the next six months and unveiling plans to offer trading in the German bond futures that are Eurex’s mainstay in Europe.

Lower fees

Lower fees have meant that the industry is already reaping the advantages of competition.

The obvious question is whether the Eurex investment will succeed in this harsh environment. It seems clear that this will depend on the efficiency of the Eurex system and on its transatlantic clearing model.

“Generally, I believe we have created a very good model which will generate a lot of benefits to the industry, to the end client and to the firms but also result in a profitable venture for Eurex,” Gisler told swissinfo.

“We are very excited. We are very happy that we have received our licence to start Eurex US and we are looking forward to the next weeks and months during which we want to create liquidity on our exchange.”

“I think we have a very good chances of success and the main reason for that is because we have built up a new exchange. It has no legacy problems and we don’t have to operate a floor, which is a very costly thing,” he added.

swissinfo, Robert Brookes

Key facts

Eurex was created in 1998 with the merger of DTB (Deutsche Terminbörse) and SOFFEX (Swiss Options and Financial Futures Exchange).
Both pioneered electronic trading platforms for derivatives markets.
Eurex US will have a staff of about 45 people.
Eurex had record annual turnover of more than one million contracts in 2003, up 27 per cent from 2002.

In brief

Eurex, a joint venture of the Swiss and German stock exchanges, started derivatives’ trading on Sunday at 1900 local time.

The move is being seen as a “battle” between the traditional exchanges of Chicago and European innovation.

Eurex brings lower trading fees for all market players, thereby creating a level playing field.

Before Eurex, CBOT had for years operated a tiered fee structure, which gave discounts to members.