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From Our Man In Boca, Tom Groenfeldt: How To Launch A New Exchange - FIA Panelists Tell [Almost] All

Date 14/03/2013


If you thought the Emerging Exchanges session at Futures Industry Association (FIA) in Boca Raton was going to be about the new Cambodian rice futures and options, you’d have been disappointed to find that the newest emergent was NASDAQ OMX NLX with Charlotte Crosswell, CEO, operating out of that distant, exotic and occasionally dangerous jungle -- London. It will offer UK and European listed interest derivatives.

Only the moderator, Jorge Alegria, CEO of the Mexican Derivative Exchange, could call himself a double emerging -- an emerging business in an emerging market.

Their ideas:

Copy existing products, said Crosswell at NASDAQ OMX NLX.

“We spend a lot of time looking at new products, but we are going out with lookalike products from day one to get critical mass.”

She plans to compete with Liffe and Eurex on products such as interest rates. The edge she plans to exploit is using LCH.Clearnet as a horizontal clearing platform to overcome “vertical silos.” Silos got a lot of talk, often as in Crosswell’s case with the term “vertical” added -- no design explanation of what a horizontal silo looks like.

While all the panelist modestly admitted to their own brilliant intellectual property (IP) they also admitted pure brilliance by itself was not enough. They need more.

Liquidity, for instance.

NASDAQ had the bright idea of putting multiple assets on the same horizontal clearing platform, LCH, to permit cross margining. It hasn’t announced a launch date yet, but if Crosswell was vague on timing she was clear on prerequisites -- liquidity.

“We are working with a range of firms which will be there from Day One. We need liquidity providers and then attract the buy side. With new exchanges you need immediate volume, so you need incentive schemes. Our support has been there because of the post-trade piece, and we anticipate good support for the launch.”

Over at NYSE Liffe U.S., CEO Tom Callahan, said fantastic new products are not enough -- you need to connect..

“If there is one thing I underestimated when I started this project, you tend to overweight the value of interesting new products. But we quickly learned that practical connectivity and operational excellence are demanded by clients. There are no bunny slopes for new exchanges when it comes to operations. Clients hold us to the CME standard. There is the CME way of doing things and the wrong way.”

Fortunately, he said, the company, had Liffe Connect which was a big head start because it provided huge connectivity to clients.

“We still had an immense amount of work to get to clients, to the right desk, the right firm and then meet the high operational standards.”

Crosswell said NASDAQ has worked with ISVs and vendors ahead of the launch to make sure they were able to support the new platform.

Callahan at NYSE Liffe U.S. thinks capital efficiency will be a winning strategy for his firm because it lets investors bring together cash, futures and interest rate swaps in one environment.

“There are reasons that doing this is extremely difficult,” he explained. “You have split regulatory jurisdictions and different margin rules. But as difficult as it is, ultimately as an industry that is where we need to go. New exchanges will succeed on the basis of their ability to deliver capital efficiency.”

Could swap futures be coming soon? Crosswell said that when she first raised the topic banks would laugh at her.

“It is fascinating how that has evolved. I swear every bank has agreed at the same time that the swap future has a role to play; we are trying to work out when. In Europe you don't need to go out yet, but I think a lot of banks and exchanges are looking at it.”

If one launches a swap future, there could be a rush to offer the product she added.

“We won’t do it unless we have a market.”

Callahan said that NYSE Liffe U.S. has a swap note that is gaining traction.

“There has never been a better time in our careers to innovate because of all the regulatory changes that are happening. It’s probably the best time and the worst time because of the resource constraints of our customers, the banks, and their caution. We see institutional resistance to innovation because of the risk aversion and operational scarcity that exists in the market.”

What are the keys to launching a new platform or product successfully?

Liquidity, said Sunil Hirani, CEO at TrueEx, which calls itself the world's first CFTC-designated, Dodd-Frank compliant exchange for interest rate swaps.”

“Liquidity. Sorting out liquidity because that solves a lot of problems. Getting liquidity on the platform -- everything else is solvable after that.”

Paul Cusenza, CEO of Nodal Exchange which offers electricity trading on hundreds of hubs, said the big challenge is persuading people to try a new platform.

“One hundred percent of the people who trade power are enabled to trade on our platform, but it takes years to get some people to trade a new commodity on a new exchange.”

Callahan said he’d like the authority to direct the operational and IT resources of NYSE Liffe customers.

“The big impediment is getting people to do the development work, code new algos and get it through their new product committees and their risk committees.”

Neal Brady at Eris Exchange wants to see regulatory certainty. And speaking about Mexico, Alegria said he’d like to see the banks support exchange products and try to make the transition not because it is mandated but because it is beneficial to have a much bigger market.

“Having the banks support the liquidity on these new products trading on the exchange would be my wish.”