Exchanges launching look-a-like contracts in competition with incumbents is creating more costs than benefits, a group of Commodity Trading Advisors have said.
Speaking at FOW’s private buyside forum last month, a selection of leading London-based CTAs said that challenges posed by the launch of look-a-like contracts were often outweighing the benefits of a competitive market.
Across Europe and the US, a new age of competition is coming to the exchange traded derivatives market as exchanges seek to wrest liquidity from rivals. Often this takes the form of an exchange launching a replica of a liquid contract on a rival exchange.
The fragmentation of liquidity, increased instances of slippage and distortion of market pricing were cited as the key drawbacks from look-a-like contracts.
Exchanges often implement aggressive fee-structures for new contract launches – often offering free trading - and incumbents frequently cut fees in response to a challenge.
However, the CTAs attending the forum said that the fee reductions did not compensate for the increased operational challenges.
The forum, which was held in partnership with Object Trading and ABN Amro, brought together a group of CTAs, proprietary trading firms and brokers.
The participants discussed a range of operational challenges from regulation to FCM consolidation. The discussion was set out in a free whitepaper, which can be downloaded below.
To download the whitepaper, click here.
For more on Object Trading, click here.
For more on ABN Amro, click here.