The consortium of 12 financial houses that have joined forces
to create an exchange set to challenge CME Group, believe they
have a greater chance of success than previous failed attempts
to grab marketshare away from the Chicago giant.
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
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
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.