A group of a dozen banks and brokerage firms have announced that they will form a new futures exchange to challenge the CME. This is not the first time that we have seen challenges to the dominant futures exchange, but all have failed.
Futures exchanges are network monopolies, so once established it is very difficult to develop an alternative network. Liquidity is what customers are buying and the cost of liquidity is much higher than the exchange fees. However, once liquidity is established the fixed fees for trading are high relative to the marginal cost of producing or clearing the trade. The value of the exchange is being the marketplace.
Given the dominance of the exchange, the only place to squeeze costs is with the FCM or broker. Brokers have seen their profits diminish while the CME has seen new highs for its stock price. Banks are the biggest customers for the exchange so it is natural that they would want to fight for lower fees. The banks believe that they can take back this business and provide a lower cost alternative for their trading. Success for these new exchange ventures has usually been forcing a lower cost structure for trading. We will see whether this competitive threat works in 2008.
Futures exchanges are network monopolies, so once established it is very difficult to develop an alternative network. Liquidity is what customers are buying and the cost of liquidity is much higher than the exchange fees. However, once liquidity is established the fixed fees for trading are high relative to the marginal cost of producing or clearing the trade. The value of the exchange is being the marketplace.
Given the dominance of the exchange, the only place to squeeze costs is with the FCM or broker. Brokers have seen their profits diminish while the CME has seen new highs for its stock price. Banks are the biggest customers for the exchange so it is natural that they would want to fight for lower fees. The banks believe that they can take back this business and provide a lower cost alternative for their trading. Success for these new exchange ventures has usually been forcing a lower cost structure for trading. We will see whether this competitive threat works in 2008.
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