Executives at the Chicago Mercantile Exchange have pulled off what could turn out to be the most important coup in the institution’s recent history. It’s not the launch of their IPO in December, although that must count as a great success in itself given both the sheer effort of transforming from a mutual to a public company as well as going public in the toughest new issue market for decades.
What they ought to be congratulating themselves for is the introduction at the end of January of Eagle I. It’s a new feature on the Merc’s Globex electronic trading system that enables complex strategies in its benchmark Eurodollar product to be traded electronically for the first time.
“Globex is a great trading system, and has wonderful capability for products that trade on a spot basis such as currencies or our e-mini stock index contracts,” says the Merc’s CEO, Jim McNulty. “It’s a different story for interest-rate products, where you can be looking at trading spreads varying from 90 days to 10 years.”
If the system works and catches on, traders worldwide will be able to work for 23 hours a day the kind of strategies that up until now they could only get done in the pits in Chicago during normal trading hours. Eagle I is also going to trade in Chicago side by side with the Eurodollar pit.
At some point it could even overtake the pit, but no-one is predicting either a quick or a gradual move off the floor. “The customers will make the choice of using the floor or Eagle,” says McNulty. He and his colleagues will only step in once there’s no more value in using the pit. “We’re not ideologues about which delivery platform our customers should use,” says Craig Donohue, chief administrative officer.
What makes the new platform such a coup is the timing. Eurex announced earlier in the month that it would be setting up a US futures exchange of its own next year, and the Eurodollar contract could be a prime. The Merc now has a year to establish itself as the undisputed centre of liquidity for trading Eurodollars regardless of transaction in the pits or electronically. If it’s successful, Eurex’s challenge will be much harder to mount.
It’s rare, if not downright unheard of, for one of the Chicago exchanges to be congratulated for immaculate timing where electronic trading systems are concerned. But for its chairman, Terry Duffy, it fits with his image of what the exchange is: “We’re not a second-fiddle institution,” he says. “We were the first US exchange to demutualize and the first to launch an IPO.”
That took two years to achieve after 98.3% of members voted to change to a for-profit model. “Getting the members on side was probably the easiest part of the process,” says Duffy. “The plan was well formulated after many hours of meetings before we put it to a vote. The hard part was afterwards, spending two years going back and forth over the issues of moving from doing business one way for over 100 years to being a public company.”
All the planning paid off. That, coupled with the huge increase in volume of exchange-traded derivatives over the past two years of high market volatility, helped make the IPO one of the year’s most successful. Priced at $35 a share, it opened at $39 and is now hovering just below $50 a share.
But the IPO also brought to the surface some of the internal politics at the Merc, which is the talk of the futures community in Chicago. Powerful members and former chairmen Leo Melamed and Jack Sandner are said to be jealous of the profits McNulty has made on his options in the IPO they brought him in to oversee.
