Only said the brokers often yell for markets. Obviously no one in the pit HAS to make a market. Way to read between the lines.
PIMCO on Floor Vs. Screen
- Thread starter bone
- Start date
Only said the brokers often yell for markets. Obviously no one in the pit HAS to make a market. Way to read between the lines.
Sure, bids get pulled in the pits. No one knowingly enters a bad trade. My point was would you rather be able to physically observe behavior, such as in the pits, or "trust" human nature on the screen upstairs? I personally would rather have observable behavior.
The ED contract, NOT OPTIONS, is well known for being suited to institutions. Many locals complained on its introduction that it was too well suited to the institutions and not small enough for the little guy.
I agree: I worked in the S&P, treasuries, Euro and currency futures and options markets at the merc for 10 years on the floor.
... For my trading it is more efficient to work off the screens. This is a lower cost option when all the variables are weighed. Add to this the benefit of an exchange membership and things are even better ....
However, working on the floor in a fast market was a lot of fun and a great challenge: I miss it but like I said its just a lower cost option to work off-floor .
BONE - Hmmm .... I remember a badge with that tag ....
Remarks by CBOT Chairman Nickolas J. Neubauer addressing a lunch of FCMs and market users at FIA/FOA conference in London on Wednesday:
In 2001, we had our second highest volume year ever, and so far in 2002 we are on track for an even better performance. The uncertainty in the global financial markets has caused investors to increasingly seek the safe haven of our treasury complex, particularly in our 10, 5 and 2-year notes, resulting in large volume increases in both the open auction and electronic marketplaces.
We made major technology enhancements to our open auction trading floor last year, and we plan to invest another $24 million in technology this year to make these markets more efficient for you. We have created a high tech, cost-efficient trading arena that embodies the best of both worlds
Picture this. A trading arena that enables customer orders to be executed in the best-priced platform at that time. FCMs have their sales staff equipped with a/c/e screens constantly monitoring price and depth of market so that their customers are provided the best service possible. Local traders flashing electronic orders to their desk staff for entering on a/c/e. Their desk staff constantly communicating with them via hand signals, headsets and wireless technology. Other local traders keeping cross-platform prices efficient by using wireless vendor order entry systems linked to a/c/e.
Whatâs also different in this picture? Very few non-sales producers on the trading floor. Very few runners, and very few paper tickets.
My vision of the Chicago Board of Trade has not changed from when I spoke here last year soon after my election as Chairman. We want to increase the overall value of the exchange, whether that means an electronic future, open auction, or some combination of the two.
Our plan is to offer and support two platforms, and give our customers a choice between electronically assisted and efficient open auction, and an electronic platform. We recognize in London and Europe many users are more active in our electronic platform, and we are constantly reviewing all of our rules and regulations to make sure both trading platforms are comparable and favorable to our customers. Our pricing schedule is designed to balance the two platforms, with the goal of creating a single, deep pool of liquidity. Based on our volume growth this year, our strategy is working.
We know it is working because the percentage of customer trade is about the same on both platforms and runs about 20 to 25% on each. Most of the electronic trade comes from member and proprietary accounts that use both platforms in their trading strategies.
Open auction is an essential part of our strategy because it ensures the transparency and communication necessary for the level playing field we offer the users of our markets. The information flow in a central open auction pit is greater than what exists in a screen environment, and this point has been made in academic studies. âWhoâs doing what?â for example, is asked again and again by our customers, and such information creates tighter markets and wider participation.
Contrast what we have at the Board of Trade with the numerous dot.coms or electronic platforms that were supposed to take our business away, none of which have time-tested surveillance programs like ours, the price transparency and daily mark-to-market found in our markets, or a triple AAA credit rating backing of all their trades. My point is that it seems to me that the two platforms together offer customers a choice, and ensure the market transparency and fairness that is the hallmark of exchanges like the Board of Trade.
With efficient, reliable markets comes a renewed focus on products. The big news on the financial futures front is our new CBOT interest rate swaps complex. As one of our customers so aptly put it, we live in a LIBOR world. LIBOR forms the basis for most commercial and industrial borrowing and lending in the U.S. these days. The mortgage markets and even the tax-exempt bond market have largely shifted to LIBOR benchmarks.
It follows that financial risk managers need cost-effective LIBOR-based risk management tools. The message from our members and their customers was clear; develop swap futures contracts.
Well, one thing I believe we do well at the Board of Trade is listening to our customers. We listened in this case and last October launched our 10-year swap futures contract. I am happy to say that volume has been growing steadily and open interest is over 40,000. On Friday, we plan to launch 5-year swap futures, and we look forward to building up this complex even more.
We recognize that market innovation cannot stop with the design and launch of a contract. Virtually every analysis of every economic sector in recent years includes discussion of shifting capital structures. In our own part of the financial world, you are well aware that consolidation has resulted in there being fewer FCMs than there were 10 years ago. There are many fewer primary dealers in the government securities market. And such key functions as mortgage servicing have undergone significant consolidation.
In 2001, we had our second highest volume year ever, and so far in 2002 we are on track for an even better performance. The uncertainty in the global financial markets has caused investors to increasingly seek the safe haven of our treasury complex, particularly in our 10, 5 and 2-year notes, resulting in large volume increases in both the open auction and electronic marketplaces.
We made major technology enhancements to our open auction trading floor last year, and we plan to invest another $24 million in technology this year to make these markets more efficient for you. We have created a high tech, cost-efficient trading arena that embodies the best of both worlds
Picture this. A trading arena that enables customer orders to be executed in the best-priced platform at that time. FCMs have their sales staff equipped with a/c/e screens constantly monitoring price and depth of market so that their customers are provided the best service possible. Local traders flashing electronic orders to their desk staff for entering on a/c/e. Their desk staff constantly communicating with them via hand signals, headsets and wireless technology. Other local traders keeping cross-platform prices efficient by using wireless vendor order entry systems linked to a/c/e.
Whatâs also different in this picture? Very few non-sales producers on the trading floor. Very few runners, and very few paper tickets.
My vision of the Chicago Board of Trade has not changed from when I spoke here last year soon after my election as Chairman. We want to increase the overall value of the exchange, whether that means an electronic future, open auction, or some combination of the two.
Our plan is to offer and support two platforms, and give our customers a choice between electronically assisted and efficient open auction, and an electronic platform. We recognize in London and Europe many users are more active in our electronic platform, and we are constantly reviewing all of our rules and regulations to make sure both trading platforms are comparable and favorable to our customers. Our pricing schedule is designed to balance the two platforms, with the goal of creating a single, deep pool of liquidity. Based on our volume growth this year, our strategy is working.
We know it is working because the percentage of customer trade is about the same on both platforms and runs about 20 to 25% on each. Most of the electronic trade comes from member and proprietary accounts that use both platforms in their trading strategies.
Open auction is an essential part of our strategy because it ensures the transparency and communication necessary for the level playing field we offer the users of our markets. The information flow in a central open auction pit is greater than what exists in a screen environment, and this point has been made in academic studies. âWhoâs doing what?â for example, is asked again and again by our customers, and such information creates tighter markets and wider participation.
Contrast what we have at the Board of Trade with the numerous dot.coms or electronic platforms that were supposed to take our business away, none of which have time-tested surveillance programs like ours, the price transparency and daily mark-to-market found in our markets, or a triple AAA credit rating backing of all their trades. My point is that it seems to me that the two platforms together offer customers a choice, and ensure the market transparency and fairness that is the hallmark of exchanges like the Board of Trade.
With efficient, reliable markets comes a renewed focus on products. The big news on the financial futures front is our new CBOT interest rate swaps complex. As one of our customers so aptly put it, we live in a LIBOR world. LIBOR forms the basis for most commercial and industrial borrowing and lending in the U.S. these days. The mortgage markets and even the tax-exempt bond market have largely shifted to LIBOR benchmarks.
It follows that financial risk managers need cost-effective LIBOR-based risk management tools. The message from our members and their customers was clear; develop swap futures contracts.
Well, one thing I believe we do well at the Board of Trade is listening to our customers. We listened in this case and last October launched our 10-year swap futures contract. I am happy to say that volume has been growing steadily and open interest is over 40,000. On Friday, we plan to launch 5-year swap futures, and we look forward to building up this complex even more.
We recognize that market innovation cannot stop with the design and launch of a contract. Virtually every analysis of every economic sector in recent years includes discussion of shifting capital structures. In our own part of the financial world, you are well aware that consolidation has resulted in there being fewer FCMs than there were 10 years ago. There are many fewer primary dealers in the government securities market. And such key functions as mortgage servicing have undergone significant consolidation.
Due to developments such as these, the Chicago Board of Trade has introduced another innovation, the Designated Market Maker, or as we often say, a designated liquidity provider, to establish liquidity in new contracts.
Liquidity always has been important to our exchange and to you. It allows you to transact with minimal or no price slippage. It allows you to get into or out of the market when it is convenient for you. It helps control costs. So to help market users in all of these regards, the Board of Trade has contracted with ABN Amro to stand in our swaps futures pit as a designated liquidity provider.
This concept is new for us, but we are growing accustomed to it based on the positive results we are seeing so far in the complex. As I noted, volume and open interest are up significantly since the introduction of a liquidity provider. Not so long ago, one market participant did a swap futures trade with a $400 million notional principal at one price. Trades with $100 million to $250 million notional have become common. The March-June and June-September rolls have gone smoothly. Users of swaps futures could get out of their positions easily and for reasonable cost. You cannot always say that of the over-the-counter markets in mortgages, corporate bonds or swaps.
ABN Amro always has a trader in the pit that is prepared to make two-sided markets with a specified bid-ask spread or better, and at a specified size or better. In short, this represents committed capital as well as a commitment from us to serve you and your customers better.
Another product complex to which we will be devoting more resources is our Dow Jones futures. I am excited about the potential that exists for this complex, particularly when we have the opportunity to partner with such a strong global brand as Dow Jones. We have worked aggressively to ensure the continued liquidity and growth of this complex, as we want it to succeed, and we are pleased that we were able to renew our licensing agreement with the Dow Jones Company for another five years.
We are going to commit resources to ensure that this complex is marketed effectively, and we have incorporated state-of-the-art technology in the Dow pit and on our electronic trading platform in order to provide quick and accurate information to our customers. I believe if we do our job right, we can build this contract to average daily volume levels of 50,000 contracts. With the e-mini Nasdaq generally averaging over 150,000 contracts, I think this is an achievable goal for the Board of Trade and I am committed to working with Bernie Dan and his team, as well as with the Dow Jones Company, to further enhance this complex and provide additional trading opportunities for all types of investors.
Again we have made an extra effort to support this market. We have appointed two electronic market makers â Susquehanna International Group and Bear Hunter Structured Products â to provide liquidity. On June 4th we set a record with over 11,000 contracts traded. We believe this is solid performance at an early stage and we look forward to building on this momentum in the coming months.
The importance of the LIBOR-based swap curve in all areas of finance, and our affiliation with the Dow Jones brand has renewed the Board of Tradeâs focus on extending the global reach of some of our more traditional contracts. Of course, none of this works if we do not take care of the distribution side of the equation.
Our global reach has broadened steadily with our electronic trading platform. When we launched trading on the platform with Eurex, we had 21 direct connections in the European time zone. Today, that number has doubled to 42. Now every major FCM in London can provide its customers with access to our highly reliable trading platform. Overall, 85 firms currently trade Board of Trade products on our electronic system from 167 locations in the U.S., Europe and Asia. In May, we also introduced our internet access point, which is an ideal connection alternative for those firms who are new to trading CBOT products as well as for our Asian firms.
In closing, I want to say that our members and management team, led by David Vitale, are committed to providing you with the deepest, most transparent and liquid markets on a fair and level playing field. It is our goal to provide you and all users of our markets with the most effective and cost-efficient open auction and electronic trading platforms, and allow you to make the choice where you want to place your business at our exchange.
You can quote me as saying that I am very optimistic about the future of the Chicago Board of Trade, because of our history of strong customer service and product development, because of the market liquidity, flexibility and integrity provided by our membership, and because of the leadership provided by our management team.
Again, thank you for joining us for lunch today. We are working hard to improve the attractiveness of doing business at our exchange while maintaining the integrity of the Chicago Board of Trade, and I appreciate being given the time to discuss some of those changes with you.
John's Comments
What the heck is going on here? The CBOT is beating the pants off the CME for the Interest Rate Swaps contracts. Most of the CBOT trade is in the pit, aided by contracted Primary Market Makers, while the CME has assigned Lead Market Makers for their purely electronic markets. Sure the designs are different, reflecting the dynamics of each exchanges flagship interest rate contracts. But why is the mostly pit traded CBOT contract winning so far over the electronic traded CME contract? Makes one go hmmm.
I will say this. It is still early in this competition. But the competition is heating up. The CBOT will launch 5-Year Interest Rate Swaps on Friday, June 21(http://www.cbot.com/cbot/www/cont_detail/0,1493,10+24+109+7008,00.html), adding another contract to its planned Interest Rate Swaps curve. The CBOT also has plans for options on 10-Year and 5-Year Interest Rate Swaps in the fall and will soon present to its Board of Directors plans for a 2-Year Swap contract, according to comments from a CBOT official at a press conference today about the launch of the 5-Year Swaps.
According to the CBOT, since Feb 1 when ABN AMRO began as Primary Market Maker, 10-Year Interest Rate Swaps average daily volume has more than doubled and open interest has increased almost seven-fold. Total Open interest in the 10-Year Swaps stood at 33369 as of yesterday's close.
By comparison, total open interest in the 2-Year, 5-Year and 10-Year Swaps at the CME total just 759 contracts, with no reported volume yesterday.
It is early, but these are most puzzling results. Electronic trading is supposed to win, right? The CME is kicking butt, right? What the heck is going on here? Maybe some common assumptions are wrong. Maybe we need to take a fresh look at what transparent and liquid markets really are. I know I am.
BTW, if you skipped over Nick Neubauer's Other Voices contribution/speech, you are missing a good read.
********
The CME set more new volume and open interest records again yesterday, but I am not going to tell you about them. But I am sure they will soon enough.
Regards,
John J. Lothian
Liquidity always has been important to our exchange and to you. It allows you to transact with minimal or no price slippage. It allows you to get into or out of the market when it is convenient for you. It helps control costs. So to help market users in all of these regards, the Board of Trade has contracted with ABN Amro to stand in our swaps futures pit as a designated liquidity provider.
This concept is new for us, but we are growing accustomed to it based on the positive results we are seeing so far in the complex. As I noted, volume and open interest are up significantly since the introduction of a liquidity provider. Not so long ago, one market participant did a swap futures trade with a $400 million notional principal at one price. Trades with $100 million to $250 million notional have become common. The March-June and June-September rolls have gone smoothly. Users of swaps futures could get out of their positions easily and for reasonable cost. You cannot always say that of the over-the-counter markets in mortgages, corporate bonds or swaps.
ABN Amro always has a trader in the pit that is prepared to make two-sided markets with a specified bid-ask spread or better, and at a specified size or better. In short, this represents committed capital as well as a commitment from us to serve you and your customers better.
Another product complex to which we will be devoting more resources is our Dow Jones futures. I am excited about the potential that exists for this complex, particularly when we have the opportunity to partner with such a strong global brand as Dow Jones. We have worked aggressively to ensure the continued liquidity and growth of this complex, as we want it to succeed, and we are pleased that we were able to renew our licensing agreement with the Dow Jones Company for another five years.
We are going to commit resources to ensure that this complex is marketed effectively, and we have incorporated state-of-the-art technology in the Dow pit and on our electronic trading platform in order to provide quick and accurate information to our customers. I believe if we do our job right, we can build this contract to average daily volume levels of 50,000 contracts. With the e-mini Nasdaq generally averaging over 150,000 contracts, I think this is an achievable goal for the Board of Trade and I am committed to working with Bernie Dan and his team, as well as with the Dow Jones Company, to further enhance this complex and provide additional trading opportunities for all types of investors.
Again we have made an extra effort to support this market. We have appointed two electronic market makers â Susquehanna International Group and Bear Hunter Structured Products â to provide liquidity. On June 4th we set a record with over 11,000 contracts traded. We believe this is solid performance at an early stage and we look forward to building on this momentum in the coming months.
The importance of the LIBOR-based swap curve in all areas of finance, and our affiliation with the Dow Jones brand has renewed the Board of Tradeâs focus on extending the global reach of some of our more traditional contracts. Of course, none of this works if we do not take care of the distribution side of the equation.
Our global reach has broadened steadily with our electronic trading platform. When we launched trading on the platform with Eurex, we had 21 direct connections in the European time zone. Today, that number has doubled to 42. Now every major FCM in London can provide its customers with access to our highly reliable trading platform. Overall, 85 firms currently trade Board of Trade products on our electronic system from 167 locations in the U.S., Europe and Asia. In May, we also introduced our internet access point, which is an ideal connection alternative for those firms who are new to trading CBOT products as well as for our Asian firms.
In closing, I want to say that our members and management team, led by David Vitale, are committed to providing you with the deepest, most transparent and liquid markets on a fair and level playing field. It is our goal to provide you and all users of our markets with the most effective and cost-efficient open auction and electronic trading platforms, and allow you to make the choice where you want to place your business at our exchange.
You can quote me as saying that I am very optimistic about the future of the Chicago Board of Trade, because of our history of strong customer service and product development, because of the market liquidity, flexibility and integrity provided by our membership, and because of the leadership provided by our management team.
Again, thank you for joining us for lunch today. We are working hard to improve the attractiveness of doing business at our exchange while maintaining the integrity of the Chicago Board of Trade, and I appreciate being given the time to discuss some of those changes with you.
John's Comments
What the heck is going on here? The CBOT is beating the pants off the CME for the Interest Rate Swaps contracts. Most of the CBOT trade is in the pit, aided by contracted Primary Market Makers, while the CME has assigned Lead Market Makers for their purely electronic markets. Sure the designs are different, reflecting the dynamics of each exchanges flagship interest rate contracts. But why is the mostly pit traded CBOT contract winning so far over the electronic traded CME contract? Makes one go hmmm.
I will say this. It is still early in this competition. But the competition is heating up. The CBOT will launch 5-Year Interest Rate Swaps on Friday, June 21(http://www.cbot.com/cbot/www/cont_detail/0,1493,10+24+109+7008,00.html), adding another contract to its planned Interest Rate Swaps curve. The CBOT also has plans for options on 10-Year and 5-Year Interest Rate Swaps in the fall and will soon present to its Board of Directors plans for a 2-Year Swap contract, according to comments from a CBOT official at a press conference today about the launch of the 5-Year Swaps.
According to the CBOT, since Feb 1 when ABN AMRO began as Primary Market Maker, 10-Year Interest Rate Swaps average daily volume has more than doubled and open interest has increased almost seven-fold. Total Open interest in the 10-Year Swaps stood at 33369 as of yesterday's close.
By comparison, total open interest in the 2-Year, 5-Year and 10-Year Swaps at the CME total just 759 contracts, with no reported volume yesterday.
It is early, but these are most puzzling results. Electronic trading is supposed to win, right? The CME is kicking butt, right? What the heck is going on here? Maybe some common assumptions are wrong. Maybe we need to take a fresh look at what transparent and liquid markets really are. I know I am.
BTW, if you skipped over Nick Neubauer's Other Voices contribution/speech, you are missing a good read.
********
The CME set more new volume and open interest records again yesterday, but I am not going to tell you about them. But I am sure they will soon enough.
Regards,
John J. Lothian