In an unexpected move, 12 founding companies have set about establishing an exchange that will focus on US Treasury futures in an attempt to do battle with the Chicago behemoth. The dauntless dozen that will launch the as yet unnamed exchange, but which has been given the project name moniker of Four Seasons are: Bank of America, Barclays Capital, Citadel, Citigroup, Credit Suisse, Deutsche Bank Securities, E-Speed, Getco, JPMorgan, Merrill Lynch, Peak6, and Royal Bank of Scotland.
In the recent past both Eurex US and Brokertec have both tried to wrestle volume away from Chicago Board of Trade and Chicago Mercantile Exchange without success. But a source close to the conception of the Four Seasons project told FO Week that it had a better chance of succeeding than previous fanciful attempts to take away liquidity from the Chicago exchanges before they joined forces last year.
Other potential clearers could be LCH Clearnet, which remains a US regulated entity or Intercontinental Exchange.
Due to the emerging rivals set up combined with a changing market environment and shifting sentiment towards CME Group, the source said he believed the new exchange was better positioned to challenge the newly combined entity.
While Brokertec consisted purely of banks, Four Seasons has an important element of involving representatives from algorithmic specialists, the source explained, adding that this meant that it wouldnt rely on primary dealers for liquidity. Another difference between the days of Broketec and now is that the markets are now fully electronic, which has resulted in lower costs compared to when there was a split of liquidity between screen and floor. A further reason why Four Seasons could swim where Brokertec and Eurex US sunk is that the equity of the exchange is being held by those that are adding liquidity.
One of the most important aspects and reasons for establishing the new exchange is that of providing a marketplace which will offer lower fees than that of CME Group.
After the takeover of the Board of Trade, it was widely hoped that fees would be trimmed, but only a minor adjustment has been made from a year ago.
The level of angst at the cost of doing business on CME Group is high, said the source who remained realistic about the exchanges chances of the exchange succeeding, and to what its targets are.
The target audience the new exchange will be looking towards is not the brokerage community, but primary dealers. The proprietary users, the source said. We could see liquidity split between the new exchange and CME Group. It will be difficult to convince users to move away from CME, but not impossible. All new initiatives have long odds, but if they come off, the pay out is enormous.
Sceptics have pointed at how difficult it will be to take liquidity away from CME Group, citing Eurex USs tussle whereby fees were cut by both sides. Once Eurex slashed fees, CBoT followed suit and nobody could be bothered to move over their books. The eventual winners at the end of the day were the traders, a trader said.
Others echoed the sentiment but wished the new venture well. Its a brave task, especially when seeing how others have failed, and CME will do everything in its power to stop liquidity shifting. And the irony is that while the new exchange may be trying to stop CMEs monopoly, CME might just be big enough to stop them in their tracks, said a source.
While it has been revealed that E-Speed will provide the platform for the project very little else has been made public. It has been not been announced who will clear the exchange, though it is widely speculated that The Clearing Corp will take care of this.
The Clearing Corp would seem to be an obvious choice, but unless they can offer cross margining and offsets then you wonder what the benefit would be, said one observer.