By David Roeder
What’s next — a free cell phone for every new futures trader?
The Chicago Mercantile Exchange and the Chicago Board of Trade are in a fee-cutting frenzy, lowering the cost to trade on their markets in response to keen competition. They want to fend off challenges to their turf from European exchanges, such as Frankfurt’s Eurex AG, which last week plowed new ground with its offer of a $249 Apple iPod music player.
Taking its own tack, the Merc on Monday promised six months of free trades on its electronic system. The offer starts Sept. 1 and is open to new traders enrolled in training programs at firms that do business at the Merc. They must be trading only their own money, not that of customers.
It’s a way to encourage business on the Merc’s Globex network, its biggest source of new business. When compared with business on the trading floor, electronic trading is more lucrative for the Merc because it commands higher fees.
The impact on revenue at the Merc, a publicly traded company, should be small because the offer doesn’t apply to current traders. The hope is that after six months of testing their trading legs on Globex, a new generation of customers will venture forth.
“CME is committed to developing the trading community of the future, and this initiative is a step in that direction,” said the exchange’s chairman, Terry Duffy. He said the program will work well with the Globex Learning Center, a place where people can sample trading software and engage in mock trading.
The fees being waived typically amount to 44 cents per contract. Volume limits apply to the offer and range from 1,000 contracts in the first month to 8,000 in the sixth month.
Both the Merc and the CBOT have slashed fees for business emanating from overseas. And the CBOT has told federal regulators that it will offer free trades for two to three years for firms that agree to make electronic markets in interest-rate options.
Longer term, the exchanges will be forced to keep rates low, said T. Eric “Rick” Kilcollin, a former Merc president. “The technology is such that there are tremendous economies of scale” for an exchange that builds a global trading network, he said, “so there will be constant pressure to cut prices to build volume.”
The Merc is trying to protect its Eurodollar franchise from duplicate contracts offered elec- tronically by London-based Euronext.liffe. Eurex is taking aim at the CBOT Treasury contracts, but so far neither challenge has amounted to much.
Besides the iPod offer, which is limited to certain trading by July 15, Eurex has said it plans to rebate some fees to high volume traders, testing a practice called payment for order flow that’s seldom seen in the futures industry but common with stocks.
Some in the industry have raised the questions about the plan, saying it could induce brokers to rout orders to Eurex even if that exchange doesn’t yield the best prices for customers.
But David Van Wagner, chief counsel for market oversight at the futures industry’s federal regulator, the Commodity Futures Trading Commission, said past Eurex promotions have not applied to trading of customer accounts. “If the customers were involved, our antennae would go up,” he said.
Van Wagner said Eurex has yet to submit its rebate plan to the CFTC.
Source: Chicago Sun-Times