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Boca Bits & Pieces, Day Two

Wednesday’s big news came from Nasdaq, which announced plans to enter the energy futures market, challenging the dominance of the CME and ICE. Named Nasdaq Futures (NFX), the new market will launch around midyear with support from leading energy companies.

“What do the CME, ICE and Hillary Clinton have in common?” Nasdaq’s CEO Bob Greifeld asked reporters. His answer? “All seem to have a monopoly on their exchanges.”  

“We’re here to disabuse you of that idea,” he added. “Monopolies are against the natural order of competitive forces.”

Not one of Nasdaq’s customers wanted the new exchange to be a vertical silo model, he said. So the new market will be a horizontal model, clearing through the OCC rather than an exchange-owned clearinghouse.

The exchange has 12 FCMs committed to NFX, representing about 25 percent of the energy marketplace.

“One result of the monopoly structure in the futures industry has been that the energy futures world has become electronic, evolving from open outcry, but the benefits of moving to electronic have not gone to industry participants,” Greifeld said. “The reduction in transaction costs has only benefitted the exchanges.”

So NFX will charge fees of about 60 cents per side, in comparison with a charge of $1.34 or $1.45 charged by the other energy futures exchanges, he said. “Twenty cents is the current rate in the options market,” he added as a comparison to similar execution fees on other electronic markets.

The exchange will have the participation of both physical oil merchants and interdealer brokers, as well as major liquidity providers and market makers in energy options.

NFX will start by offering WTI and Brent futures, power and natural gas. It will also offer options from day one.

Hazem Dawani, the CEO and cofounder of OptionsCity Software, which was selected as a preferred independent software vendor for NFX, commented that the Nasdaq announcement was “evidence of a rising tide in futures markets, bringing futures on the same path with the competitiveness of the equity markets.”
While the depth of liquidity of NFX will not immediately rival the CME and ICE, he said, OptionsCity expects strong interest from market participants at launch. Nasdaq said it was aiming for a 10 percent marketshare in the energies within 18 to 24 months. The lower cost of business could also make energy products more appealing to professional traders of other asset classes, he added.

Later, a lively exchange leaders panel delved into the regulatory issues all the exchanges are facing, with the first question to panelists being, “What don’t regulators get?”

Jeffrey Sprecher, CEO of ICE, said that in a world where customer interaction is borderless, regulators are trying to put up borders. It’s hard to know how things will shake out in Asia, for example – “Will they want to be subject to U.S. regulations or be balkanized?” he asked.

Charles Li, the head of HKEx, said his exchange is resigned to whatever is decided and will comply. “Our primary challenge is that we have a huge market with a lot of liquidity, but we need to become more open and build connectivity,” he said.

Much of the talk on the panel was about the link between Hong Kong and Shanghai that HKEx worked to establish. Although the link has not attracted a lot of order flow yet, Li said, “We’re building a bridge and eventually people will come across it. What’s important to note is that the connect program is not simply a little bridge, it is a connectivity or interoperability of regulators, exchanges, and clearinghouses.”

Andreas Preuss, CEO of Eurex, pointed up the increasingly global nature of the industry by noting that this year the exchange leaders panel consisted of two Asian exchanges, two US exchanges, and one European exchange.

“The biggest regulatory challenge has to do with the five of us running global businesses, and regulation even in 2015 being everything but global,” he said.  “We have total asymmetry of the core parameters to risk management in the US compared to European regulation.”

All the panelists agreed that “we need a harmonized set of core rules that regulators around the globe understand.”

Regulatory indecision is confusing participants and forcing some companies to abandon certain ways of doing business, Preuss said.

There was some friendly banter between Li and Sprecher over the HKEx’s acquisition of the London Metal Exchange, which Sprecher said he had at one time been certain ICE would acquire, but no animosity was showing on this year’s panel.

Asked the question who would be on the exchange leaders panel 10 years from now, Preuss replied: “[Phupinder] Gill. Because at the CME you can only get into executive management. You will never be allowed out.”
To which Gill, the CME’s chief executive, responded, “But death is on my side.”

The panelists said that an even more internationally diverse panel would probably take the stage in 10 or even five years.

Cybersecurity was “front of mind” for all the exchange panelists, with Sprecher saying the issue had changed the nature of his company. ICE is more of a “front and center target” now that it owns the New York Stock Exchange, he said, so they have been strongly focused on cybersecurity.

“Companies used to be able to have a single user ID and password. You can’t do that anymore. It changes your whole thought and behavior.”

Gill added that the way exchanges communicate with their members is key.

All the exchange leaders said they expect even more regulatory rules in the future.

In response to the question of what the panelists thought about Nasdaq’s entry into the derivatives market, Sprecher said, “I’m so old that I was here when ELX announced the previous attempt to do this…. People my age know what that means.”

Odds and ends

RJ O’Brien’s acquisition of Kyte will close on no other day than St. Patrick’s Day next week. It also gives RJO a complete back office in London.

Keynote speaker Sir Ken Robinson wowed and entertained the audience, as one of the more insightful and funny speakers ever at FIA Boca.

SGX’s annual balcony party was another hit this year. Cigars, drinks and a view of Boca.

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Rudolph is the managing editor and head of editorial operations at John Lothian News (JLN).