It was a considerable victory for the upstart exchange because it would make it easier for end users to transfer their open interest to its clearinghouse from the CME Group clearinghouse or vice versa. 

But as we noted at the time it takes two to tango and the rule would not hold much weight unless the CFTC forced CME Group to accept EFF trades. Given a chance to say whether he would compel the CME early in the controversy, CFTC Chairman Gary Gensler told Futures that he would let the issue work through the appropriate channels. That he did.

What ensued was an almost comical back and forth between CME Group lawyers and the CFTC with an increasingly frustrated ELX asking the Commission to take more affirmative action. CME Group claimed that EFFs were illegal wash and or fictitious trades. The CFTC staff concluded that they were not and CME came back with yes they are.

At one point we figured that that we could simply add “CFTC says no they aren’t” and “CME Group says yes they are” to previous stories and be done with it.

Not to make light of the controversy because there were real issues on both sides. Exchange for Risk (EFR) transactions usually involve two related but materially different products such as cash and futures Treasuries where there is a risk involved. It is hard to dispute that the sole purpose of EFFs was to transfer open interest.  At the end of the day CME didn’t want that to happen,  ELX did and the CFTC, while perhaps thinking it may be a good thing, decided to stop short of forcing it.

The Commission did, however, hedge its bet by stating, “It is possible that in the future, under a different set of circumstances, the Commission could conclude that an exchange’s prohibition of EFFs does not comport with Core Principal 18.”

It also reiterated its disagreement with CME Group on its position that EFF trades violated the Commodity Exchange Act and said the exchange could not characterize them that way.

While this particular battle is over, I have a feeling we probably have not heard the end of EFF trades.

Who will merge next? Who will offer a competitive bid? I guess it is inevitable but there is something annoying about seeing the business press simply speculating on potential deals once these mergers get in the public consciousness.

For some members of the media a merger announcement gives license to simply speculate on what may or may not be in the  works. Surely some of these stories may be floated by people in the know attempted to get a reaction to a potential tie-up or perhaps by a company attempting to push a competitors’ offer price higher but even in those cases where there is an actual source the media should not indulge.

A few months ago it was about CME Group and the Chicago Board Options Exchange (CBOE)  after its initial public offering  and CBOE and everybody else. I know that there may be some synergies created from such a tie-up and that most equity option exchanges have found a partner but that only means that such stories are unnecessary. I only want to see a story if there is some actual news because I assume the players are exploring their M&A  opportunities.

The recent merger announcements may lead to further mergers or they may not. We know they will lead to endless speculation as to who will be next. CME Group put out a release this morning that was obviously a response to rumors and speculation regarding its reaction to the DB/NYSE Euronext announcement.

 Perhaps what is most annoying about this indulgence into “who will be next” is that it takes away from more important analysis. Such as is this a good thing? How can we cheerily be talking about financial sector consolidation when we are still licking our wounds from a global economic meltdown brought on, in large part, by “too big to fail,” institutions.

These announcements came out the week before St. Valentines Day and in the spirit we offer a slight adjustment to the famous line, “Love means never having to say you’re sorry.” In the financial world, “Size (market cap) means never having to say your sorry (or be accountable).”

We continue to be captivated by big mergers  but what it leaves us with — especially at this level — are more too big to fail institutions.

According to the article, “The new so-called volume-synchronized probability of informed trading (VPIN) metric looks at the imbalance of trade relative to the total volume of the market. It identifies flow toxicity.” One of the metric’s creators, Dr. David Easley, explained flow toxicity as “Flow toxicity refers to the risk that liquidity providers face when trading with traders who have better information than they do,” explained Easley. The flow of orders “is considered toxic when traders are selling when they’d rather be buying, and buying when they’d rather be selling.”

Supposedly, the metric is able to measure in real-time and could offer exchanges, regulators and traders warnings if the markets are headed toward another crash. It does sound promising and they have interest from regulators and others already.

Saying events like the flash crash are “now predictable and possibly preventable” seems a tall order, though, and one that should probably be taken with at least a grain of salt. We’ve seen in the past that putting too much faith into any one indicator can be very dangerous, just look at Value at Risk.

It’s been almost seven months now since the flash crash happened. In that time we have had reports released, reports debated, fingers pointed and new rules written. A lot has happened in that time. Like most events, though, they loose their impact the further away they become. For a reminder of just what a panic the crash caused, just listen to this recording from the S&P 500 E-mini pits from that day.

Preventing future crashes and investor panic is quite notable, but claiming they may be “predictable and possibly preventable” might be a bit rash. Then again, a skeptic never will find the Holy Grail.

The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) held a joint round table discussion to gather views from panelists as the two regulators move to start writing rules governing swaps.  Gary Gensler, CFTC chairman, released a short statement before the round table saying, “Requiring swaps to be traded on regulated trading platforms will bring transparency and better pricing to the derivatives markets. This will lower risk and costs for businesses. I look forward to hearing panelist views at today’s round table to inform our rule-writing in this area.”

Panelists were mostly in line with what Gensler is hoping to see transpire, although there was still room for discussion on how SEFs and SB SEFs will operate. Much of that discussion centered around concepts of “fairness,” especially as it pertains to exchange access and disclosure.  While some advocated open access to anyone, many argued for minimum standards to be put in place, much like those in place on futures exchanges like CME Group.  They argued that while this move will mutualize counterparty risk, it will not eliminate it, so the SEFs should work to minimize possible risk.

Panelists stressed, though, their desire to see clear and objective standards put into place.  Instead of leaving things to be subjectively decided, most called for clear lines to be drawn to handle eventualities like how a firms growth will be viewed as well as the procedures for breaking trades and removals from the exchange. While there was an understanding that these markets will change and evolve over time, the prevailing desire among panelists seemed to be for clear answers and concrete guidelines. Not surprising considering the period of volatility, fear and often panic we recently saw.

The regulators have a big job in front of them as they have to define almost everything in this previously secretive over-the-counter market, beginning with determining what a swap is and which will be on what exchanges. Those are the questions that will have to be answered first, before questions of disclosure and registration can be definitively answered. To meet the deadline for new rules, the regulators have said they hope to have proposals of the rules drafted by mid-December.

Gensler appears to have gotten religion though and has worried some industry insiders with an aggressive agenda. He acknowledged the error of his ways and has been the administration’s chief proponent for moving OTC trading onto exchanges or at least requiring they be cleared.

He also supported early on the view that spectulators where responsible for spikes in crude oil in 2008. He has put out a proposal for hard limits in energy futures but those limits don’t appear as stringent as many were looking for and the disaggregated data the commission began releasing at the end of 2009 did not support the view that speculators were the culprit.

There has been an unease between the CFTC Chairman and the industry, which has gotten use to a pretty friendly relationship with recent past chairman.

It may not be fair to judge the relationship to past ones because of the unique economic crisis the country is facing but he is certainly not promoting the minimalist approach to regulation several of his past predecessors has. 

However, Chairman Gensler let his guard down a bit at the recently concluded Futures Industry Association conference in Boca Raton Fl., and engaged with industry leaders. His speech wasn’t the best from a CFTC Chairman at this annual event but it certainly was the best from Gensler to date and he appeared willing to engage the industry rather than simply download his agenda.

Following his speech in front of the group, Gensler stuck around and asked a question during a panel with exchange leaders.

Gensler actually turned the tables on the heads of the major futures exchanges and challenged them to back his recommendations on OTC regulation as being in their best interest. No one really bit on this piece of theatre but it was perhaps the warmest exchange we have seen between Gensler and industry leaders.

It is not vital that the exchange leaders and heads of futures brokers agree with its regulator over the regulatory policy it needs to pursue but if there is a lack of trust or communication that could do more damage, so it was nice to see the new Chairman engage the industry.

  Crain’s Chicago Business provided the honor based on CME’s bloated board of directors. Crain’s stated, “A whopping 31 non-executive directors guide the exchange operator — the largest board of any U.S.-based public company and nearly double the next largest Chicago-area board.”

Crain’s cite experts who peg the perfect board size at eight to 12, adding anything over 14  is problematical.

I am sure the expert, in general, is correct though to apply such a test to a subject so broad seems silly. For them to cite as proof recent performance of the stock, is sillier.

It was interested as I have been reading Leo Melamed’s new book “For Crying Out Loud,” and just went through his take on the moves to reduce the exchange’s bloated bureaucracy.

 (I have not completed the book but so far it is the story of how Leo and some other old line insiders conspired to oust CME Chairman Scott Gordon and rein in the power of President and CEO Jim NcNulty.)

 The problem for the CME — and other mutual exchanges contemplating the new business landscape — at the time they were going through demutualization is that they were burdened with too many board members and too many committees. They had to get lean and mean in order to quickly react to competitive pressures. You couldn’t have these intramural squabbles. Melamed acknowledges that need but says by 2002 it had perhaps taken it too far and the exchange lost “its systems of checks and balances.”  

 He claims they were moving to the other extreme, “their philosophy was to have the board as a purely oversight-of-management role, without any strategic planning input.”

 Melamed and his allies felt that Gordon did not show enough independence and too quickly sided with McNulty’s agenda. It also got personal as there were efforts to reduce the role of former chairmen Melamed and Jack Sandner.

 While not electing to take sides, we certainly have seen what problems can occur when a board doesn’t take an active role and managers —who based on compensation packages and other factors may not take a long-term view— are allowed a free hand.

 Crain’s expert stated that adding too many board members from an acquirer is a red flag and a sign of compromise. Of course the growth of the board, which had been reduced to 19 in 2007, was the result of adding members mainly due to the merger/acquisition of the Chicago Board of Trade.

 This was not your typical acquisition and no one knowledgeable of the two organizations would have expected the CBOT not to get significant representation.

 The story does make a point that the compensation of non-executive board members, north of $6 million, is high and perhaps it is time to pare down the size of the board, however there are specific reasons the board is shaped the way it is.

Futures has refrained, for the most part, in doing these types of lists, mainly because the resources needed to do a  truly in depth job are so great. I am not an expert on corporate organization but I bet there are many more important factors in  measuring a board’s performance than size.

BEX was launched in August 2005 as an electronic stock exchange but failed to gain market share, according to BSE. BEX did not see significant gains during a summer of record trading volume.

The BSE will continue to be active in the marketplace and will support its remaining ventures including the regulation of the Boston Options Exchange (BOX).

It’s not rare to see an exchange disappear because of low trading volume. It is strange nowadays, however, to see an exchange just disappear versus watching two other exchanges duke it out to see who gets to buy it and for how much. Of course, the BEX was not a long-running profitable exchange, and, equities are not futures.

Is this a sign that it’s getting harder for exchange to find ways to gather new market share?

Well, BOX, a fully automated market that opened in 2004, has also struggled to gain market share and typically ranks last in volume among the six U.S. options exchanges. However, BSE says BOX’s innovative technologies and pricing strategies have kept it successful.

So is it then, that a small and new exchange will only work if you have innovation?

Also, to be gone by November are two trading rooms at the New York Stock Exchange (NYSE) leaving it with only two remaining. And it had closed one floor already earlier this year.

The Chicago Mercantile Exchange recently said it would cease floor trading in certain agricultural futures contracts. The NYSE also closed another floor earlier this year.

Who knows how long the last two floors at the NYSE will last.

The Nymex did not, however, name those parties, which are rumored to be the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME) Group, neither of which are saying anything other than “no comment,” which surely means YES!

Speculation now lies in which exchange will end up the victor — seems to be NYSE Euronext at the moment.

Which exchange ends up with Nymex may not seem like a huge deal for either exchange, seeing as each suitor has just acquired a big market: NYSE Group taking Euronext to form NYSE Euronext and the CME winning the Chicago Board of Trade to form CME Group, but let me tell you, it is important.

With its purchase of the CBOT, the CME Group is paving the way to making Chicago not just the futures center of the United States, but more. Just the fact that Nymex is considering a bid by the CME shows New York may have given up on trying to be the biggest financial city (for exchange traded markets) in the United States. Of course, Nymex may choose NYSE Euronext to help level that eventual Mega-U.S. exchange versus Mega-Euro exchange playing field, so it really can go either way.

It’s a tough one. What about more lost jobs? After the CME announced about 380 jobs would be lost through its merger with the CBOT, Nymex put out a statement saying it may need to fire about 150 employees to cut costs. But that’s a blog for another day.

“The only thing in the building that was going up today was the elevator. Even the escalator was broken on the second floor,” he wrote in an e-mail. More importantly, he writes that a serious flaw was exposed in ICE electronic trading platform: once cotton was offered at the limit, Web ICE shut down as a result.

“What happened was that trades on ICE continued to take place below limit. It was announced that any transactions that took place below limit would be nullified and canceled. This not only impacted out-right transactions, but also spreads in which one leg, or both, used inappropriate price levels. This created a nightmare for some, as they didn’t know their position. But worst of all, following the announcement trades below the limit continued to occur.”

More as the story develops.

“It’s going to be interesting to see if there is enough interest to become viable contracts. I expect them to be more of a slow burn,” says Rick L. Kment, ethanol and biofuels analyst for DTN. “The thing that has made RBOB and crude oil so successful is not commercial traders, while they are an important part of it. It’s really the investment and the non-commercial trader that takes that offsetting position; and especially with swap contracts, that kind of limits itself to being commercially driven.”

R. Jeffrey DeReamer, managing director of EthanolMarket.com LLC, is more enthusiastic about the contracts. “Ethanol is more and more an energy product and less and less an agricultural product,” he says, and that the ability to trade them on the same platform as RBOB gasoline swaps is an important development for traders who are trying to cover themselves in both positions. He adds that while ethanol is growing in capacity and in terms of world trade, as a true commodity, there is still room for growth.

Of course the entire grain complex, particularly corn, can be seen as an energy product. The CBOT ethanol futures contract has seen slow growth with open interest of just over 1,000 but its cash settled swaps contract launched last December has grown rapidly with open interest greater than 7,500.

The Nymex ethanol swaps contracts do not violate the non-compete agreement Nymex has with the CME Group, which hosts Nymex energy futures on the CME Globex electronic trading platform. A CME spokesperson says the key is that the Nymex swaps will trade on Nymex’s OTC ClearPort Trading platform, adding that the CBOT contracts will migrate to CME Globex in the first quarter of 2008 from the eCBOT trading platform. CME also hosts Nymex metals contracts on Globex and has yet to announce a plan for the CBOT metals futures contracts, which may not trade on Globex as per the non-compete agreement.