In '97-98 Eurex cut prices and wiped out LIFFE in Bunds. However, Eurex had already built up decent order flow (largely from German banks) and was about as equal as LIFFE. LIFFE stupidly didn't match the price cuts. The market then tipped to Eurex and by June 98 it had taken virtually the entire market from LIFFE.
In 2002 (?) USFE (backed by Eurex) tried to do to CBOT in bonds/notes what Luttnik is trying to do with STIRs. It claimed it had commitments from big firms, and it undercut CBOT fees. It gave volumen incentives to big firms. But unlike LIFFE, CBOT immediately responded to the price cuts and basically charged zero to trade. USFE never got any traction. USFE didn't have any liquidity base like Eurex did in Bunds.
My takeaway--cutting prices doesn't work if you are starting from zero liquidity wise. It is unlikely to work even if you have some order flow because the incumbent can match you and will still get the business because of liquidity advantage. Further, the "commitments" and "support" of big firms are extremely soft. They like to prop up an entrant in order to put some competitive pressure on the incumbent for a while, but they are not going to move enough order flow away from the incumbent to eliminate its liquidity advantage.
One thing that bugs me about LIFEE-Eurex comparisons when people look at contracts flipping are that at the time, LIFFE was open outcry and Eurex was computers.....BUT more importantly the German government basically said, "We are going to trade German debt on a German exchange" and pushed for the flip to happen.
Big firms will tell you everything you want to hear, then do nothing. We started several FX contracts at CME relying on the "word" of big firms to trade them. They didn't.
When I was on the board of CME, we listed a contract (can't remember the name of it but I lost about $25k trying to create liquidity in it) for hedging Fannie Mae etc and so did CBOT. It was a true battle for liquidity. At the end of the day, neither of us won because the players who said they would trade it didn't.....
This is an interesting thing to me. It would be great to hear any stories you have on how you start up new contracts for trading. Does the "house" trade it to start and give it liquidity? Or do you get commitments legally? Can you?
You cannot get commitments legally. No order flow, no trade! You can sign up and give special deals to people to make a market. You can wave all fees to all customers for a specific time if you'd like.
Markets exist for reasons. Futures markets are "professional markets" or more "industrial markets". Stock markets are that, but are retail focused.
Here is a super simplified explanation.
For a futures market to be successful there has to be a pretty big pain point. People in the market need to feel pain because they cannot manage their risk. Hence, a farmer looks out at his corn field and feels pain every day. He has one time to harvest corn (November) and he is subject to the weather and elements he cannot control.
The miller who takes the corn and turns it into something feels an opposite kind of pain. They know what their equipment costs and they know what their energy costs are. They know their labor costs, and they know what customers are willing to pay. What they don't know is the price of the raw material, and how much of it will be available.
Risk and pain on both sides of the market that cause them to lose money, or maybe their entire business. There are natural sellers and buyers that want to transact.
Enter a futures market which has price discovery and allows both sides of the market to hedge their risk. The farmer waits to sell at a futures price he can recoup his operating costs and make a profit. The miller buys futures contracts for delivery dates so they can streamline and harmonize their raw material costs. They know there will be grain there when they need it at the price they purchased because the Exchange Clearinghouse guarantees it.
Dirty capitalist speculators (people like me) get in the middle of those prices and assume the risk of the farmer and the miller. We get paid to do it if we buy low and sell high. We lose money if we don't. Without speculators the farmer and the miller might never be able to hedge their risk.
If you look at a chart of oil prices and onion prices, one has a very predictable and non-volatile price chart. One has a lot of highs and lows, shortages and surpluses. The more predictable one has a futures market attached to it.
Some thoughts on the Biden proposal: Taxes and the Total State
https://chicagoboyz.net/archives/70912.html
it shouldn't have a chance of passing....marxist to the core
In '97-98 Eurex cut prices and wiped out LIFFE in Bunds. However, Eurex had already built up decent order flow (largely from German banks) and was about as equal as LIFFE. LIFFE stupidly didn't match the price cuts. The market then tipped to Eurex and by June 98 it had taken virtually the entire market from LIFFE.
In 2002 (?) USFE (backed by Eurex) tried to do to CBOT in bonds/notes what Luttnik is trying to do with STIRs. It claimed it had commitments from big firms, and it undercut CBOT fees. It gave volumen incentives to big firms. But unlike LIFFE, CBOT immediately responded to the price cuts and basically charged zero to trade. USFE never got any traction. USFE didn't have any liquidity base like Eurex did in Bunds.
My takeaway--cutting prices doesn't work if you are starting from zero liquidity wise. It is unlikely to work even if you have some order flow because the incumbent can match you and will still get the business because of liquidity advantage. Further, the "commitments" and "support" of big firms are extremely soft. They like to prop up an entrant in order to put some competitive pressure on the incumbent for a while, but they are not going to move enough order flow away from the incumbent to eliminate its liquidity advantage.
One thing that bugs me about LIFEE-Eurex comparisons when people look at contracts flipping are that at the time, LIFFE was open outcry and Eurex was computers.....BUT more importantly the German government basically said, "We are going to trade German debt on a German exchange" and pushed for the flip to happen.
Big firms will tell you everything you want to hear, then do nothing. We started several FX contracts at CME relying on the "word" of big firms to trade them. They didn't.
When I was on the board of CME, we listed a contract (can't remember the name of it but I lost about $25k trying to create liquidity in it) for hedging Fannie Mae etc and so did CBOT. It was a true battle for liquidity. At the end of the day, neither of us won because the players who said they would trade it didn't.....
That's what I was referring to when I said that Eurex had built up order flow from German banks.
And yes, the commitments are of the "I'll respect you in the morning" or "the check is in the mail" variety.
This is an interesting thing to me. It would be great to hear any stories you have on how you start up new contracts for trading. Does the "house" trade it to start and give it liquidity? Or do you get commitments legally? Can you?
It's an interesting subject.
You cannot get commitments legally. No order flow, no trade! You can sign up and give special deals to people to make a market. You can wave all fees to all customers for a specific time if you'd like.
Markets exist for reasons. Futures markets are "professional markets" or more "industrial markets". Stock markets are that, but are retail focused.
Here is a super simplified explanation.
For a futures market to be successful there has to be a pretty big pain point. People in the market need to feel pain because they cannot manage their risk. Hence, a farmer looks out at his corn field and feels pain every day. He has one time to harvest corn (November) and he is subject to the weather and elements he cannot control.
The miller who takes the corn and turns it into something feels an opposite kind of pain. They know what their equipment costs and they know what their energy costs are. They know their labor costs, and they know what customers are willing to pay. What they don't know is the price of the raw material, and how much of it will be available.
Risk and pain on both sides of the market that cause them to lose money, or maybe their entire business. There are natural sellers and buyers that want to transact.
Enter a futures market which has price discovery and allows both sides of the market to hedge their risk. The farmer waits to sell at a futures price he can recoup his operating costs and make a profit. The miller buys futures contracts for delivery dates so they can streamline and harmonize their raw material costs. They know there will be grain there when they need it at the price they purchased because the Exchange Clearinghouse guarantees it.
Dirty capitalist speculators (people like me) get in the middle of those prices and assume the risk of the farmer and the miller. We get paid to do it if we buy low and sell high. We lose money if we don't. Without speculators the farmer and the miller might never be able to hedge their risk.
If you look at a chart of oil prices and onion prices, one has a very predictable and non-volatile price chart. One has a lot of highs and lows, shortages and surpluses. The more predictable one has a futures market attached to it.
Very cool. Thank for breaking that out.
It's fascinating to me
That should be "about as equally liquid as LIFFE."