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Fur Flies in Merc Elections

The Chicago Mercantile Exchange experienced a velvet revolution in January when it elected its new chairman and restructured its board of directors. The hotly contested election for chairman saw a record voting turnout. When the politicking was over, Scott Gordon, the former vice chairman, defeated David Silverman, who came from nowhere a few weeks earlier to fall just two votes shy in his quest to replace outgoing chairman Jack Sandner.

Far more interesting than the elections themselves, however, were the machinations of the king-makers behind the scenes. Sandner, the former chairman who has held the post for 13 out of the past 17 years, began his Merc career as a crony of former chairman and current senior policy adviser and chairman emeritus Leo Melamed. But after several years of what Sandner and many exchange members perceived as Steinbrenner-esque meddling, he began to split from his mentor. The two reportedly clashed for years on matters great and small, particularly as Melamed began to seek more and more influence over the day-to-day operations of the exchange.

By the very end of Sandner's tenure as chairman, Gordon had emerged as the leading candidate to replace him. CME watchers put Gordon firmly in the Melamed camp. Although Sandner propped up a slew of candidates late last year, all of them quickly dropped out for lack of support. But then in early January,

Silverman, reportedly a Sandner supporter, threw his name into the fray and, after a furious charge, nearly upset the favored Gordon.

Silverman's strong showing evidently impressed upon Gordon the need to distance himself from Melamed early in his tenure as chairman. In one of its final decisions, the outgoing board named Sandner special policy adviser—a role similar to that of Melamed—setting up a potentially ugly situation. Gordon made it clear in his first press conference, however, that while he would "avail himself of the knowledge” of the board's "two remarkably talented advisers,” neither would exert any undue influence over the board—a promise that appealed to the many Merc members who had grown wary of both figures. He stressed, above all, the need to create unity both on the board and among the exchange's membership, which has had mixed feelings about the Merc's push for new technology and other issues. "We will have a united board and a united exchange,” he said, "and I feel very good about it.”

The Mixed Success of the Sectors Market

In the late 1970s, some forward-thinking mutual funds thought that investors who were bullish on certain areas of the economy might want to invest in mutual funds based on specific industry sectors. The concept blossomed, and it wasn't long before exchanges tried out their own option versions of the idea. The American Stock Exchange, the Philadelphia Stock Exchange and the Chicago Board Options Exchange have listed—and delisted—scores of sector products during the last decade-and-a-half in the hopes of attracting niche investors exposed to smaller sectors of the equity market and thus creating the Next Big Thing in index options.

Rarely have they succeeded in this task for any appreciable length of time. The AMEX, for instance, lists 29 sector products, but only a handful enjoy even eyebrow-raising, much less heart-pumping, volume numbers. The AMEX's most successful sector product, the Morgan Stanley Tech 35, does somewhere in the 5,000 to 10,000 contract range on an average day, says an AMEX spokesman, "but that comes and goes. Some days we'll do 30, some days we'll do one.”

Many sector products have been one-hit wonders at exchanges through the years, but the PHLX has, of late, managed to sustain a relatively stable core of sectors. After years of flat volume numbers for languishing sectors, the PHLX repackaged its sector group and began marketing the products aggressively in 1994. "We saw a psychology change in terms of the way the investment public was approached,” says Joseph Rizzello, executive vice president of marketing and product development at the PHLX. "We saw a lot of technical research reports that talked about sector rotation. We figured we had an opportunity because we had some good subindices, so we repackaged them as sectors.”

The most important sector in the PHLX's retooled arsenal is its semiconductor index, which, according to Rizzello, has become the industry standard, garnering attention from such mainstream market-watchers as CNBC and CNN. Other big sectors include the Keefe, Bruyette & Woods bank sector, the gold/silver sector and the oil services sector, introduced last February. "All of a sudden,” says Rizzello, "the oil service sector has become quite popular, because this particular part of the market has become the hottest part of the oil industry.”

Almost by definition, the full range of sector products cannot trade in high volume simultaneously. They appeal to narrowly exposed investors in hot areas of the equity market. Investors with broad exposure generally opt for broad-based indices such as the Standard & Poor's 500, the S&P 100 and the Dow Jones Industrial Average. Relatively few investors, by contrast, are so diversified as to need sector products to fine-tune, say, health care exposures among health care payers, products and prov-iders—each of which represents a Morgan Stanley index product offered by the AMEX. "Most people,” says the AMEX spokesman, "don't want to think that hard.”

At the moment, says the PHLX's Rizzello, "we do the lion's share of the [sectors] trades each day—we're about 70 percent of the market.” Last year, the exchange traded 2.4 million sector contracts, a record. But this could change at a moment's notice. "When a sector gets hot,” says Richard DuFour, executive vice president at the CBOE, "sometimes they'll trade a few thousand, and then they'll fade off again. Exchanges want to have a family of them available, because they know that if a sector heats up, they won't miss the boat while trying to develop a new product.” That may be true, but sectors have a shelf life of only so long, and many have already gone the way of the McRib and Cheddar Melt.

New Contracts for '98

The Minneapolis Grain Exchange has sought permission from the Securities and Exchange Commission to trade futures and options on electricity, following the lead of the New York Mercantile Exchange, which recently won CFTC approval to list three Eastern electricity contracts to go with its three Western electricity contracts. The MGE is looking to tap the Mid-Continent Area Power Pool, one of 10 electricity pools in the United States. The region includes seven states and two provinces: Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Wisconsin, Saskatchewan and Manitoba. But unlike the NYMEX contract, the MGE's will trade during both on-peak (6 a.m.–10 p.m.) and off-peak hours.

Meanwhile, the NYMEX is seeking CFTC approval to list futures contracts on coal, which, says president Patrick Thompson, "is the single-largest feed stock for electricity in the United States.” The contracts will be for 37 billion BTUs of coal delivered on either the Ohio River or the Big Sandy River.

The Chicago Board of Trade plans to develop a real estate future contract in the next few months to cover the real estate industry. It will be based on a Dow Jones index of real estate investment trusts. The exchange also plans to continue to develop its catastrophe options series and expects to release two new cat options by year's end.

New Futures for Argentina

The Argentine Futures and Options Exchange, originally scheduled to begin trading in January, will open its doors instead in July. The exchange is a joint venture between the Buenos Aires Stock Exchange and the Chicago Board of Trade, in the hopes of introducing the Argentines to the wonders of financial futures.

In its first year, the exchange will trade futures and options on currencies, government bonds, interest rates and the benchmark Merval equity index. Some 250 seats have been sold, and the next step will be to set up a clearing house.

OCC Discounts Fees

The Options Corp., which clears contracts for the American Stock Exchange, the Chicago Board Options Exchange, the Pacific Exchange and the Philadelphia Stock Exchange, has discounted its fees, beginning February 2.

The previous 10-cents-per-contract fee was reduced to nine cents for trades of up to 500 contracts; seven cents for 501–1,000 contracts; six cents for 1,001–2,000 contracts; and a maximum fee of $110 for trades of more than 2,000 contracts. "The graduated volume discount should generate more order flow and increase market liquidity,” says OCC chairman and CEO Wayne Luthringshausen, "which will ultimately benefit all public customers.”