This article was written by Neil Crammond, Director of Risk Management at Avem Capital Limited.
On the heels of the news of CME’s Europe pullout, this article looks at what a new entrant needs to do in order to survive. What characterises the European marketplace and what was CME doing wrong?
CME and Nasdaq came to Europe in 2011 to steal business – their failing was that they decided to copy European exchanges and as a result, both closed as zero volume. One would have expected them to follow a China/Euro bond or BREXIT index, however they chose the sand cheese and tomato sandwich route and failed to provide any new contracts.
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The result? The Nasdaq lost $120 million and CME Europe was on the hook for even more. In my view, just offering arbitrage liquidity isn’t enough; it was both lazy and doomed from the start. One potential option would have been to offer a virtual pit where everyone could see the players. A brave option yes, but something a little different too.
Additionally, volumes have not really grown over the last decade and zero interest rates have had a negative impact on exchanges where we know STIRS are popular and create liquidity and open interest. Volumes have not really grown for over a decade and zero interest rates have not helped exchanges where we know STIRS are popular and create liquidity and open interest; both of which resulting in a negative situation for investors.
When Eurex decided to take the LIFFE bund contract they made all the German banks use their exchange – it was rumoured to cost them £300 million on free trades etc. That was in the 1990s; this is now.
Sadly, these exchanges have lost their blend in recent times and it looks like their board members got carried away with what HFT and their algo companies demand. To have a positive result, the blend of exchanges is key. At 85 percent, high-frequency-trading (HFT) is not a good or successful mix.