In our annual Top 50 Brokers feature, Futures talked to many future commission merchants (FCMs) regarding what the merger of the Chicago Mercantile Exchange and Chicago Board of Trade would mean to their businesses. The reaction to it was split between small to mid-sized future-only FCMs, that saw it as positive with numerous efficiencies and greater potential to tap into over-the-counter (OTC) markets and the largest FCMs, most of which are also investment banks with large OTC books that could be challenged by the CME’s aggressive approach to tapping into the OTC space — that opposed it.

They viewed CME Group as a potential competitor and feared the pricing power of the new behemoth. But both sides agreed that if the CME Group tried to push its advantage by raising transaction and clearing fees a new competitor would emerge.

CME Group has not attempted to press its advantage—at least not by raising clearing and transaction costs though many FCMs claim the exchange is actively trying to disintermediate them — but a new competitor has emerged as a consortium of firms, mainly investment banks have announced plans to launch a new electronic futures exchange in 2008. The consortium includes: Bank of America, Barclays Capital, Citadel, Citigroup, Credit Suisse, Deutsche Bank Securities, eSpeed, GETCO, JPMorgan, Merrill Lynch, PEAK6, and The Royal Bank of Scotland.

The group’s decision to start by offering U.S. Treasury futures is predictable and unimaginative. These poor investment banks have had such a hard time in previous attempts to pull liquidity away from the CBOT’s Treasury complex that a popular newsletter writer felt obliged to offer advice to this august group.

The announcement came on Friday after the markets closed preceding a long holiday weekend, so the group was not interested in making a splash. We could not find the release, which was produced by an independent PR firm, on any of the founding company’s Websites.

When someone suggested that the CME was preparing to list Treasury futures if the merger between them and the CBOT did not go through, I pointed out that taking on the CBOT Treasury complex was similar to attacking Russia in winter. There have been several attempts and they all have ended badly.

The group’s main purpose with the exchange is probably not to wrestle control of the Treasury complex but to let the CME Group know that they are there and to make them think twice before raising fees or pressing their advantage, though the addition of eSpeed, which operates a cash Treasury platform along with hedge fund Citadel and proprietary trading firm PEAK 6 makes the challenge a little more interesting.

This entry was posted on Thursday, December 27th, 2007 at 10:36 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.