The battle between the Intercontinental Exchange and Chicago Mercantile Exchange over the Chicago Board of Trade took an interesting twist on Monday when ICE inked an exclusive agreement with Russell Investment Group parent of the Russell family of indexes.
The decision reverses Russell’s strategy of licensing its indexes to multiple exchanges and letting them fight over liquidity. Kelly Haughton, strategic director for Russell Indexes, says he believes this is a better way to go.
The move ensures that ICE will snatch futures on the Russell 2000 Index, which has grown to become the second largest equity index product at the CME in terms of open interest with more than 500,000 open contracts in its E-mini version (the Nasdaq 100 still has greater volume), from the CME. It also has been the fastest growing index product from January to May of 2007 with year on year growth of 37.5% according to the CME Web sight.
The CME is not going to simply let go without a fight. Their contract with Russell, which expires this year, allows them to list contracts out until September 2008. The CME has decided to do that and announced that they along with Standard and Poor’s will soon list a new E-mini small cap stock index. The S&P small cap 600 index is highly correlated to the Russell 2000 but the announcement did not state whether the new futures contract would be based on the S&P 600 or an entirely new index.
The announcement did state that, following the expiration of the agreement with Russell, CME and S&P would provide incentives and encourage market participants to transfer open interest from the Russell 2000 to the new small cap benchmark. If they succeed the ICE would be paying a lot of money for an empty shell. ICE made a Hart-Scott-Rodino filing, an indication that the value of the deal is in excess of $59.6 million.
Haughton says the transition into exclusive listing will take months but eventually ICE will be the exclusive home for Russell 2000 futures. “We feel ICE will be a strong advocate for our product line, we have been looking for the best way to have a successful 1000 contract.”
The Russell 1000 is closely correlated to the S&P 500 but despite a great amount of institutional money benchmarked to the Russell 1000, the vast majority of institutional traders use the S&P 500 futures contract for hedging.
“Russell has been pleased with our relationship with the CME and the Russell 2000 has grown, but we decided to go with ICE to grow our entire family of indexes,” Haughton says.