Futures Crossing to Wait

Futures commission merchants (FCMs), the primary broker-dealers in the futures contract market, have seen two major changes in the macrostructure of their marketplace in the past month that may deepen the rift between brokers and exchanges. First came the news out of Europe that Icap, the biggest interdealer broker in the world, was planning to launch Altex, a trading network for euro-denominated interest-rate futures.

Altex would compete with the Euronext.liffe exchange, which has enjoyed a monopoly in euro-denominated interest-rate futures. Although the Altex service, according to published reports, would launch synthetic versions of the Euronext.liffe contracts rather than trade the same securities, the move is an important first step for the futures world toward a scenario now familiar in equities - broker-dealers acting like exchanges. An Icap spokesperson confirms the plan but declines further comment.

Icap's announcement also serves as a reminder that there still is no true global cross-asset marketplace. In the U.S., such a network likely would be forbidden, as the Commodities and Futures Modernization Act (CFMA) authorizes FCMs to trade customer accounts only on exchanges. As a result, no over-the-counter futures market has developed that would be analogous to the alternative trading systems and Nasdaq in the equities world, which have challenged the power of traditional exchanges.

According to John Damgard, president of the Futures Industry Association, no formal lobbying effort is under way to change the CFMA to allow OTC futures trading in the U.S. Still, "[FCMs] are circling around, waiting for a way to get into the exchange business," says a futures insider who requested anonymity.

On the other side of the broker-exchange rift, in mid-October rivals the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) agreed to merge, forming a virtual monopoly in futures trading (see related story, page 10). The deal is an indication that, unlike in equities, power in the U.S. futures exchange world is consolidating. Reportedly, the New York Stock Exchange also is interested in buying Euronext.

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