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BULKING UP

Derivatives exchanges around the world flexed their bulging muscles last year, and are taking aggressive steps to prevent a backslide in '98.

By Robert Hunter

Last year's bullish—and volatile—global equity markets made for big business in derivatives exchanges from Chicago to Frankfurt. Their volume increases over 1996 were stunning: 9.1 percent at the Chicago Board of Trade, 8 percent at the Chicago Board Options Exchange, 13.4 percent at the Chicago Mercantile Exchange and a massive 25 percent at the London International Financial Futures and Options Exchange, just to name a few.

But churning, tumultuous global equity markets were not the sole factors in 1997's record growth in exchange-listed derivatives trading—the exchanges themselves deserve most of the credit. Their aggressive acquisition, deft development and massive marketing efforts were instrumental in making 1997 the most successful year in the history of the listed markets.

The CBOT won the biggest new contract coup of the year, wresting from the Merc the coveted rights to list futures and options-on-futures on the Dow Jones Industrial Average in the most publicized derivatives negotiations ever. Meanwhile, the CBOE, already the world's largest options exchange, scored the rights to list Dow options, while the AMEX won the rights to list unit trusts similar to its Spider products, which are written against the Standard & Poor's 500. In just over three months, the exchanges combined to trade some $8.5 billion in Dow Jones index products.

The stakes for the Dow market are unprecedented, causing many to wonder if the CBOT and the CBOE have bitten off more than they can chew. It is estimated that they will spend a combined $100 million in the next five years on licensing fees, trading infrastructure and marketing to establish the Dow contracts' place in the world derivatives market—particularly in the retail sector. The Merc, which already trades the benchmark Standard & Poor's 500 future, responded by unleashing the e-mini, an electronically traded miniature version of the S&P 500, to try to pop the CBOT's balloon just a little. It did. Now the two contracts are neck and neck in trading volume.

Trouble ahead?

The aggressive moves made by the world's derivatives exchanges last year may have been born of desperation, however. Despite booming volume numbers, exchanges are seeing an increasing percentage of their business eaten up by over-the-counter products, which are more flexible and usually less expensive than listed products. Nowhere is the anxiety more palpable than Chicago, where huge volume numbers belie an uncertain future. Already, seat prices have fallen—most noticeably at the Merc, where prices tumbled more than 50 percent from 1994–97.

Moreover, the future of open outcry—which dominates the Chicago and London exchanges—is very much in doubt as screen-based trading proliferates around the world. Some predict the end of open outcry altogether in the not-too-distant future. (See "The End of Open Outcry?” on page 54.)

Some have even floated the idea that the three exchanges merge into a single entity, which they say could save as much as $100 million a year in operating costs.

But such grandiose dreams are not rooted in reality. The CBOT and the Merc have been trying since 1996 to hammer out an agreement on common clearing, which many think would save customers millions each year. But the two haven't even taken the baby step of cross-margining, in which member firms of both exchanges with offsetting positions in similar products such as index futures are required to pay only one clearing fee, thus freeing up loads of capital.

Still, the exchanges' persistence in achieving common clearing and the intensity of the negotiations are cause for optimism for clearing members. CBOT chairman Pat Arbor is hopeful: "If the Berlin Wall can come down, and the countries of Europe can come together in a European union in 1999 with one common currency,” he says, "then certainly we in Chicago, with our great commonality of members, should be able to achieve the relatively simple task of achieving common clearing between the two exchanges.”

Whether or not common clearing in Chicago is achieved this year, the word cooperation is on the lips of exchange chairmen around the world. The German DTB and the Swiss SOFFEX, along with the French MATIF, plan to combine operations into a single derivatives exchange, called Eurex, later this year. Moreover, the Swiss, Germans and French partnered with Dow Jones to develop pan-European indices—the STOXX, 666 equities covering Europe as a whole; Euro STOXX, covering countries expected to join European monetary union at inception; and two bluechip subsets of these—and futures and options on these indices appear to be in the offing.

With the powerful OTC business flexing its muscles, with indications that screen-based trading will be the wave of the future and with the euro scheduled to hit next New Year's Day, the world's exchanges took aggressive measures last year to stake their claim in the derivatives market of the future. What follows is a summary of the critical events of each major exchange in 1997, and a hint of what's on the slate for '98.


CBOT

A new trading complex and a licensing coup brought big business in '97.

Last February Chicago Board of Trade chairman Pat Arbor opened a new $182 million trading complex for its financial products. While detractors may mockingly refer to the facility as the "Arboretum,” and question the huge amount of debt undertaken to complete the project, Arbor insists that the new complex was instrumental to last year's success, galvanizing the CBOT in the face of stiffening competition. "We would not have been able to trade 243 million contracts if we did not have our new trading facility,” he says. "We were able to get more traders and more brokers on the floor. And I do not believe we would have been awarded the license to trade the Dow Jones index here at the Chicago Board of Trade if we did not have our new streamlined facility to trade the product.”

The Dow contract, which began trading on October 6, 1997, was clearly the exchange's biggest achievement last year. It broke the exchange's new-contract volume records for the first day, week and month of trading, and volume has recently hovered in the 13,000 per day range.

The exchange has a number of plans for 1998. Chief among these, says Arbor, is improving trading technology. "We are going to be concentrating on developing order-entry systems to take our deep, liquid, open-outcry market and embrace it with technology to get orders in and out of the pit better. We have to get costs down for our customers.”

The CBOT will also beef-up marketing efforts on its Dow products with a slew of print and television ads to attract retail investors. In addition, it plans to partner with Chicago-based Commonwealth Benefit Co. to offer two new types of electricity contracts, and plans to introduce a real estate index contract, based on a Dow Jones index of real estate investment trusts, as well as new catastrophe insurance contracts.

Perhaps the CBOT's most innovative project for 1998 is the Chicago Board Brokerage, which it hopes to launch late in the year. The CBOT, in conjunction with Prebon Yamane, a major New York-based interdealer broker, developed the CBB to offer trading of 30-day to 30-year cash Treasuries electronically at the CBOT. The Treasuries will be cleared through SECOX, a subsidiary of the Board of Trade Clearing Corp. The CBOT also plans to take aim at the OTC market with the Chicago Deposit Brokerage, a project under development that will allow for trading of a variety of swaps and other derivatives, again cleared by SECOX.

On January 1, the CBOT adopted risk-based capital requirements, which, according to Arbor, "addressed our members' concerns that they should not be charged for capital if they don't have money at risk. Now if futures commission merchants are lying idle twice in T-bills, there will be no capital charge against them.” And what of common clearing, the languishing initiative to lower clearing costs for CBOT and Merc members? "By nature I look at the sunny side of things,” says Arbor, "I believe things can get done.”


CME

A roller coaster '97 gave way to optimism—and a slew of products—for '98.

Last year was a tumultuous one for the Chicago Mercantile Exchange. Overall volume numbers increased by a solid 13.4 percent, but the exchanged failed to match its Chicago brethren in breaking all-time volume records. Customers, moreover, complained bitterly during the year that the exchange's fees were too high, leading to a face-saving clearing fee reduction during the summer. The fee slashing is rumored to be the impetus for 1,000 layoffs last summer. And after lowering its fees, the Merc last fall split its S&P future in half, in effect doubling the contract's costs. Many futures commission merchants were livid.

The most damaging blow came when Dow Jones awarded it lucrative contract rights to the CBOT. But the Merc simply picked up its bruised ego, dusted it off, and implemented Plan B. On September 9, it offered retail investors all of the benefits of the Dow contracts—affordability chief among them—and then some: a miniature version of its franchise S&P 500 future, traded strictly electronically on its Globex system, with promises of Internet trading in the future.

The contracts have been a huge success. From the e-mini's launch on September 9 of last year through December 31, 879,522 contracts were traded—easily the exchange's most successful product launch ever. The contract surpassed all expectations, says Merc senior vice president David Goone. "If people would have told us beforehand that we'd be sitting where we are now, we wouldn't have believed them,” he says. "It married an existing open-outcry product with technology, so it wasn't just a normal new product.”

While some products continued to languish—the disappointing federal funds rate contract in particular—most of the exchange's franchise products did quite well in 1997. Eurodollar futures volume stood at 99.8 million at year's end, an increase of 12.2 percent, while eurodollar options volume increased by a whopping 21.9 percent, to 22.2 million. Some lesser-known contracts soared as well. Mexican peso futures, launched in February 1995, saw trading volume increase by more than 100 percent, while euroyen futures, which sprung from an agreement with the SIMEX, saw volume increase by 122 percent.

Perhaps most important, the volume of its innovative mid-curve options, which was also launched in 1995, increased by 83 percent. The products allow a variety of derivatives traders—cap and floor traders, swap dealers, swaption dealers and so on—to pay little premium to take longer positions on the yield curve. "It continues to grow at a great rate,” says Goone. "We simply tweaked our existing product line—our normal eurodollar options—and came up with a very successful product.”

The Merc also elected a new chairman and shuffled its board of directors in January. New chairman Scott Gordon has been cryptic about the future direction of the exchange, but a few things are certain. Much effort will be spent in 1998 marketing its e-mini products, and making substantive improvements on them such as adding trading stops and, reportedly, making them Internet-ready. The Merc has also decided to revamp its Globex system by substituting its current Reuters platform for the NSC system in an agreement with the MATIF.

In terms of products, the Merc has applied for Securities and Exchange Commission approval for its turn-rate futures and options, which are designed to cash-settle to the overnight interest rate on the final trading day of the year to help users manage better the interest rate pressures that can affect year-end balance sheets.

In addition, the Merc has received Commodity Futures Trading Commission approval for European currency unit (ECU) futures and options, which are based on a basket of 12 European currencies, and it has applied for SEC approval to trade futures and options on the Russian ruble, the first such product to exist outside of Russia.


CBOE

The world's biggest options exchange added the Dow to its lineup.

"Without a doubt,” says Richard DuFour, executive vice president at the Chicago Board Options Exchange, "the major event of 1997 was the competition for and awarding of the rights to list the Dow Jones Industrial Average and associated indices.” It is difficult to argue with him. From October 6, 1997—the day it launched its options on the DJIA—to December 31, volume totaled some 1.75 million contracts, easily the most successful launch in CBOE history. Dow options are now the third most actively traded index options in the country, after the S&P 500 and the S&P 100, says DuFour, "and we think there's potential for them to go even higher.”

While Dow volumes may have been impressive for a new launch, the bulk of the CBOE's record-breaking volume of 187.2 million contracts came from individual equity options, which totaled 116 million, an increase of 31 percent over 1996. Contributing to that was the New York Stock Exchange's decision last year to divest itself of the options business and transfer all of its products to the CBOE. "The New York people continue to trade all the things they traded solely in New York in a separate area, plus they have access to the classes that we consolidated,” says DuFour. "That included several hundred equity options, plus the NYSE index.”

Perhaps the biggest event for the CBOE in 1997, strangely enough, occurred outside its trading floors. The 1997 Federal Tax Relief Bill featured the repeal of the short-short rule, which required mutual funds that gained more than 30 percent of their income from instruments held for less than 90 days to pay taxes on those profits, while still taxing investors who cash-out, thus taxing them twice. This had dissuaded fund managers from using options in their portfolios.

The repeal of the short-short rule started the CBOE on a massive campaign to educate mutual funds about the benefits of options. And to prove its commitment to mutual funds, it launched options in December 1997 on the Lipper-Salomon Growth Index and the Lipper-Salomon Growth and Income Index, the two most recognized mutual fund indices. The new options allow mutual fund managers to manage their exposures more precisely than the broad-based S&P and Dow options allow.

In 1998, says DuFour, the exchange will focus primarily on solidifying the gains it made in 1997, primarily through marketing. "We want to educate additional investors about options,” he says, "to teach them how to use them intelligently.”


AMEX

Spiders took over the world last year, and the AMEX hopes Diamonds will be everyone's best friend in '98.

Like most exchanges, The American Stock Exchange shattered a number of volume records in 1997. Total options volume increased by more than 61 percent, while equity options increased by 67 percent. And the AMEX's market share in options increased 21 percent last year.

As impressive as these numbers are, however, they pale in comparison with volume stats for the AMEX's Standard & Poor's Depository Receipt (Spider), a unit trust written on the S&P 500 that it introduced in 1993. After a couple years of relative obscurity, it has taken off—in 1997, volume increased by 243 percent to more than 3 million shares. The Spider trust more than doubled last year, standing at $4.6 billion by year's end, and moved to $5.5 billion in late January.

"Putting that into perspective,” says Joe Stefanelli, executive vice president of derivative securities at the AMEX, "if you compare that with, say, other index fund providers, that would put us, at $5.5 billion, somewhere in the vicinity of number three in the country, behind Fidelity and Vanguard. We view that as a heck of an accomplishment in a five-year time frame.” In addition, mid-cap Spiders grew as well, with average daily volume increasing by 95 percent.

The AMEX also scored a huge victory last year when it won the rights to list unit trusts based on the Dow. The new product, called the Diamond, is nearly identical to the Spider save the underlying index. Diamonds began trading on January 20, and in the first four days volume totaled 6.9 million shares. Its opening day volume of 1.7 million shattered the standard set by the Spider in 1993.

The AMEX won victory on another front when it spearheaded a successful campaign to persuade the Securities and Exchange Commission to remove position limits on equity flex options. This, says Stefanelli, will allow corporates to embark on meaningful put-buyback programs using flex options to synthetically buy back stock without bumping up against arbitrary limits. Flex options are similar to OTC products in that they can be structured in many ways to meet customers' specific needs. "We took the lead in that initiative,” says Stefanelli. "Now all the exchanges have the ability to do this, so we've performed something of a public service.”

In 1998, the AMEX is looking to expand its franchise in index share products. "We'd like to do something in the small-cap area, and eventually perhaps sector groups or asset groups. In 1999 or 2000, we'd like to have an index group at the AMEX, with its own marketing team and wholesalers.”


PHLX

Philadelphia dominated the sector index market in '97 and wants to increase its share with electronic trading in '98.

Despite some inner turmoil that led to the removal of longtime president Nick Giordano and a restructuring of its board of directors, last year was generally good for the Philadelphia Stock Exchange. Although its currency program continued to sag, its equity and sector options were a different story. Equity options volume increased by 53 percent, largely on the success of such hot options as Dell Computer, which PHLX trades exclusively.

Perhaps more important, says Joseph Rizzello, executive vice president of marketing and product development at the PHLX, the exchange continued to establish itself as "the leading sector options exchange in the country.” Sector options track specific sectors in the economy, such as computer technology and energy. In February 1997, the PHLX launched the Oil Service Index sector, and by December, says Rizzello, total volume had reached 500,000. More important, average daily volume reached 8,000, and more than 165,000 contracts were traded in January. "The Oil Service Index was, after the Dow Jones option, the most successful new index product to come to market in 1997,” he says. "And we built that ourselves, with our own ingenuity. We didn't have to buy it.” The CBOE and the AMEX also trade sector options, but neither is as successful as the PHLX, says Rizzello. "Comparing apples to apples, when looking at the industry-specific sectors, the PHLX captures approximately 70 percent of the sector market as it relates to trades.”

The PHLX launched an equity flex option in January, and is waiting for SEC approval on a volume-weighted pricing system, which will allow institutional players to enter orders before the market opens and notify them of matches that it can act on right after the opening bell. It expects to implement the system by June.

On December 30, 1997, the exchange began deploying its new Electronic Station, a revision of its Electronic Book system that represents the first step toward paperless trading at the PHLX. "Over the next three to six months, we're going to continue to develop the features further,” says Rizzello. "The next to come will be a full view of electronic orders and real-time positioning, which will allow specialists to automatically spot order imbalances electronically.”


NYMEX

The exchange built a brand new trading floor last year, and the traders came.

The New York Mercantile Exchange, the world's leading energy futures exchange, saw record volume in 1997 as well, swelling to 83.9 million contracts. The biggest gainers were energy futures, which reached a record volume of 52.9 million, including a more than 30 percent increase in natural gas futures.

Patrick Thompson, president of the NYMEX, attributes the success to one main accomplishment: moving into a new trading facility on July 7, 1997. The move, he says, "gave us the opportunity to quadruple the trading space available to the exchange, to introduce a lot of new technology and to have the capacity to continue to develop our technology infrastructure.” The NYMEX built it, and the traders came.

The exchange didn't introduce any new contracts in 1997, but has ambitious plans for 1998. Chief among them is to gain CFTC approval for three new Eastern electricity contracts, to match the three Western electricity contracts it launched in 1996. It also plans to launch a coal contract, which should be a big hit, Thompson says, because coal in the single-largest feed stock for electricity in the United States. The NYMEX is setting its sights overseas as well. By the end of the year, it hopes to launch a Far East-delivered crude oil contract.

The exchange also has big technology plans this year. It has reached an agreement with the International Petroleum Exchange in London to develop jointly a system that will act as the basis for the second generation of its Access overnight trading system, which it expects to install in London and New York by the middle of 1999. Since a record 1.2 million contracts were traded on Access in 1997, the exchange is eager to make needed improvements to boost volumes even higher. "We want to make sure that we have exact mirror-image functionality for the trading of energy products on exchanges,” says Thompson. "We feel this is a very important strategic alliance.”


LIFFE

Open outcry is alive and well as London looks to Europe.

While some may call last year the worst of times for the London International Financial Futures and Options Exchange, in may ways it was the best of times. Sure, the DTB took a significant percentage of the LIFFE's Bund contract last year, and this year's early surge has led many to contemplate the end of open outcry as we know it. But if open outcry is dead, and by extension the LIFFE is in dire trouble, then how to explain last year's record trading numbers?

The LIFFE last year leapfrogged the Merc to become the second-busiest futures exchange in the world, and last September the exchange for the first time traded more contracts in one month than the CBOT. Volume numbers for its eurolira futures and options and its FTSE 250 index contracts rose by more than 100 percent, while euroswiss volumes rose by 50 percent. "Screen-based trading hasn't hurt us,” says Richard Platt, director of external affairs at the LIFFE, "in the sense that it hasn't stopped our overall trading volumes from growing.”

Nevertheless, the LIFFE plans to make significant technological improvements in 1998 to stem the tide of screen trading for the near future. It is currently testing a headset system on the floor designed to improve communication with traders in the pits. It also plans to develop a platform to allow for hand-held computers in the pits, which should improve the speed with which orders are transmitted to LIFFE's order-matching system. "We will be providing the infrastructure to allow members themselves to develop the actual hardware and software so that they are compatible with their own systems,” says Platt. And on Novemebr 30, the exchange plans to go live with LIFFE Connect, a screen-based trading system for individual equity options. Eventually, all after-hours trading will be switched to the new system.

But technological improvements are only half of the exchange's plans for 1998. It will take aggressive action to make sure it becomes the dominant euro exchange in 1999. Most notably, it will turn its franchise ecufuture money market product—a future based on a basket of European currencies—into the eurofuture next January 1. "If you look at all the European money market contracts,” says Platt, "some 80 percent of all the business of all of the European countries' short-term futures contracts are done at LIFFE.” The exchange plans to keep all of that business by making all the national currency-denominated contracts it trades convertible to euro-denominated contracts. "We already have the ecufuture contract, and we're adapting it so that all of the liquidity of all the national currency instruments that trade at LIFFE will then move into the euro contract.”

In addition, the exchange began trading a new five-year British government bond future on February 26, and it plans to introduce half-tick pricing on its euromark future contract in order to compete better with the cash and OTC markets.


DTB

Electronic trading helped the Bund contract soar while London snored.

Last year represented both a beginning and an end for the Deutsche Terminborse. On the one hand, it captured a significantly higher market share for its German government Bund contract, taking business away from the London International Futures and Options Exchange, which had long dominated trading of the product. The all-electronic exchange had previously accounted for some 27 percent to 30 percent of the market, while LIFFE's open outcry pits captured the rest. But last year the DTB's market share rose to 41 percent, fueled by a 48.3 percent showing in December 1997, and in January DTB's market share surpassed 50 percent for the first time. "The market seems to have accepted and understood that electronic trading is much more efficient than trading on the floor,” says Walter Allwicher of DTB. "The fact that we gained so much market share in the Bund future seems to be proof of that fact.”

But the DTB's unprecedented success cannot be viewed as a new beginning for the exchange, because by September or October the DTB, in its current form, will no longer exist. Last year, SOFFEX, the Swiss electronic derivatives exchange, struck an agreement with the DTB to merge operations into a single electronic exchange in Frankfurt called Eurex. All of the products currently offered by the SOFFEX and the DTB will be available to Eurex traders. "From a legal standpoint,” says DTB president Jorge Franke, "these are two different exchange organizations, but from a market point of view, we will have one virtual market.”

The two exchanges will share a common trading platform initially, while the Paris Bourse-owned MATIF, the French derivatives exchange, will link to Eurex using its own trading system. By 2002, the three plan to establish a single trading system, celaring system and front end. "By means of a common front end,” says Allwicher, "we will be able to combine the Eurex platform with the French platform to create a great market of German, Swiss and French products, and thus create the largest derivatives market in Europe.” While the MATIF will carry on after Eurex becomes a reality, the DTB and SOFFEX will wither away. Franke will become Eurex's CEO, while Swiss president Jorg Fischer will become president of the Eurex's advisory board.

Meanwhile, the DTB in February launched two short-term interest rate options—the Schatz option and the three-month euromark option—to fill in its yield curve products, which now cover from three months to 10 years.


MATIF

Paris remained too expensive for many players in '97, but the MATIF plans to change that in '98.

European exchanges last year jostled to improve their standing in the dizzying runup to European monetary union. No exchange was jarred more than the MATIF. Trading volumes were mixed on the year. The CAC40 Index future saw robust volume growth of 10.4 percent, topping out at 6.5 million contracts by year's end. But the volume of the Notionnel bond future, its flagship product, fell by 4.4 percent on the year, while the Notionnel bond option fell by 5.8 percent and the PIBOR option dropped 10.3 percent.

Early in the year, the exchange thought it had guaranteed more business when it dropped clearing fees on all products from 6 French francs to 4 French francs. "We wanted to show investors that it would be an entirely new game in 1998 and 1999,” says Louis Armand de Rouge of the MATIF. "We thought this would show investors our commitment, and that they could do some cheap and efficient trading at the MATIF.” The cost-cutting measure did not produce the booming volume numbers the exchange expected.

In September 1997, SBF-Paris Bourse, already a minority owner of the MATIF, announced it was buying out all the remaining shares, investment certificates and voting rights certificates held by MATIF shareholders. While the MATIF lost its capacity for self-determination, it gained a great deal from the link. The exchange adopted the Bourse's electronic trading system for after-hours trading in Globex, snatching the contract away from Reuters, which had provided the platform since 1992. The MATIF and the Merc swapped the Bourse's NSC electronic trading system for the Merc's Clearing 21 system. The two exchanges, says de Rouge, "wanted to offer its members and end-users a common standard, rather than simply launching open outcry products on both sides of the Atlantic.”

This year should bring more of the same types of moves—cost cutting and cooperation. In addition to participation in the Eurex, says MATIF president and CEO Gerard Pfauwadel, the exchange "will be working further to enhance competitive strengths and increase market liquidity through a significant reduction in the fixed and variable costs of market access for both members and clients.” The exchange plans to move the CAC40 index to its electronic platform in April, so it will be available for both open outcry and screen-based trading. "We're offering members and end-users the chance to choose which way to go,” says de Rouge. "Often they don't care—they just want exposure to the French market.” In addition, it plans to increase efforts to educate investors on the implications of the euro. "We'll explain to the pension fund community, the hedge fund community and institutional investors in the United States what the impact of the euro will be on their asset allocation, the stock market and the capital market in Europe.”


ME

Montreal begins to emerge on the world scene.

Last year was something of a breakthrough at the Montreal Exchange. Three of the exchange's four futures contracts—the three-month Canadian bankers' acceptance (BAX) contract, the 10-year government bond (CGB) contract and the five-year government contract (CGF)—enjoyed record trading volumes, up 71 percent, 19 percent and 43 percent, respectively.

The BAX was the exchange's star performer, shattering records for single daily volume, monthly volume, open interest, daily transactions and monthly transactions in 1997. And the success has spilled over to 1998—in January, the BAX traded more than 70,000 contracts in a single day, another record. There are a number of reasons for the contract's success. Canada's economic fundamentals improved substantially last year, creating a bond shortage in the capital market. Those looking to make short-term interest rate plays were naturally attracted to the BAX. Last year's volatile currency and interest rate conditions contributed as well. And international investors started showing significant interest in the product for the first time. "In the normal development of a futures market,” says Leon Bitton, director of research and development at the ME, "domestic accounts build liquidity. But once you reach what we call critical mass, a lot more international accounts begin looking at your products. Now, in terms of liquidity, size and depth, we now have volumes that meet international standards.”

The exchange also witnessed an influx of local traders by the boatload—and many from other exchanges. "We have 130 local traders now, compared with 80 a year ago and 50 two years ago,” says Bitton. "And 16 of those used to trade at the MATIF. We've also attracted traders from Toronto and Chicago. Locals from around the world are watching our market, and they see good growth and profit opportunities.”

In 1998, the ME hopes to solidify the gains it made in 1997. It will be launching a number of new products, including expanding coverage of the BAX to between one month and three years, rather than from three months to two years.


TSE

Facing a fight or flight situation, Toronto decided to come out swinging.

Last year the Toronto Stock Exchange asked itself some hard questions. Why, it wondered, did the Canadian derivatives market, with such potential, continue to languish, while smaller markets, such as Austria, have prospered? Despite a doubling of trading volume on its Toronto 35 index future contract, the TSE's derivatives complex remained something of a sleeping giant. After some serious soul searching, mulling over the possibility of giving up the business altogether, the TSE decided that it would stand and fight.

It developed a two-pronged strategy for success. First, it would unleash on the world a blitzkrieg of marketing and education. "We launched our marketing campaign with retail seminars and new information packages,” says Steve Rive, vice president of derivatives markets at the TSE. "On the institutional side, we've started seminars and increased one-on-one calls to increase the usage of our derivative products.” The TSE plans to keep the marketing drive alive in 1998 and beyond.

Perhaps more important, the exchange has short-listed a foreign vendor to set up an electronic trading system, forsaking its open outcry system completely. The deal, rumored to be with a European exchange, could be announced as early as this month. With the success of the DTB and the development of Eurex, the TSE is hoping it's positioning itself to ride the next wave of the listed markets. "We're expecting to be able to close our trading floor by the middle of 1999,” says Rive. Just in time to ring in the next millennium.

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