A New Strategy in the Battle of Chicago


By Joseph Weber Desperate to lure business from their surprisingly aggressive competitors at the Chicago Board of Trade (CBOT), the Swiss and Germans who run Eurex, the world's largest futures market, are eliminating their fees for traders of U.S. Treasury securities. Already, the Chicagoans -- who have decisively beaten back Eurex so far this year -- are shrugging off the move, announced June 22 and in effect from July 12 for the rest of the year.

"We're experiencing record volume, including in our flagship U.S. Treasury contracts, and our financial position is sound," says CBOT Chief Executive Officer Bernard W. Dan. "The CBOT's current fee schedule is highly competitive and reflective of the value the CBOT delivers to all of its customers."

LOW FEES VS. BEST PRICES. For the CBOT, this battle could prove to be a life-or-death struggle. Until 2002, the Chicagoans and the Europeans were partners in bringing electronic trading in futures contracts to the CBOT. But they have been at each other's throats since February, when Eurex began a rival exchange in Chicago and targeted the CBOT's main product, the Treasury futures contracts.

The CBOT, which lost its status as the world's biggest futures market to Eurex in 1999, knew that the Europeans could deal it a fatal blow by winning away the Treasury contract business. So the CBOT cut its stiff trading fees by 70% or more on these contracts earlier this year. For nonmembers of the Chicago board, fees dropped from $1.25 a trade to just 30 cents, only a dime or so higher than the Eurex rate.

However, the seemingly dramatic move by Eurex may not be all that successful. True, traders will be able to save thousands of dollars in fees by going with Eurex, but they're not likely to do so as long as they continue to find the best prices for their securities at the CBOT. The pricing spreads between buyers and sellers are the narrowest in Chicago, a factor that's far more important than fees for most Treasury-market players. That's why Eurex hasn't been able to pry loose this liquidity and lure the business.

MORE EUROPEAN CONTRACTS. Eurex has found it all but impossible to generate substantial business on its U.S. exchange. After starting off with some 255,007 contracts traded in its opening month, Eurex' volume in the U.S. shrank to a paltry 51,556 in May. By contrast, the CBOT has seen its volumes soar, rising to 45.8 million U.S. financial futures and options contracts in May, a 26% jump from the same period a year ago. The Europeans have "never gained traction, and they're losing credibility as the days go by," says former CBOT Chairman Patrick H. Arbor.

Still, it would be foolish to count Eurex out, even if it doesn't snatch away the Treasury market. The Swiss-German exchange plans to phase in changes through this summer and fall that will make its U.S. unit fully global, offering seamless trading for both European and American traders in a full menu of products. While Eurex debuted with just U.S. Treasury securities, it plans to add German government securities and equity indexes, including the Russell 1000 and the Eurostoxx 50 stock indexes.

Overall volumes at Eurex will almost surely grow as European traders get more comfortable with Eurex and European contracts come on board. "We will certainly make it much more attractive for market participants to be on our exchange," vows Eurex CEO Rudolf W. Ferscha.

PATIENT PARENT. What's more, in other markets the Europeans have proved that their staying power has served them well. They killed the open-outcry futures market -- where traders met in person in pits -- in London because their computers were far more efficient for trading German securities. And they have made inroads in other European countries with patience and persistence.

Eurex' parent, Deutsche Boerse, is willing to lose tens of millions of dollars to build its foothold in the U.S. -- it has already sunk some $40 million in this effort -- and it will likely give the project several years to pay off. Finally, the Europeans drove the CBOT to become far more electronic, to deemphasize its open-outcry pits, and to look hard at its costs.

While the CBOT has clearly won the first round in this battle by keeping the Treasury securities business, it may yet have to respond more forcefully to its rival's latest salvo. Depending on how aggressive the CBOT proves to be, this war between the Chicagoans and Europeans may last a long while yet. Weber is Chicago bureau manager for BusinessWeek


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