During the last decade, financial derivative users are operating in an increasingly saturated product market. Consequently, futures exchanges are gradually shifting their endeavour from financial innovation to trading innovation as their main growth channel. The pursue of technology is evident in the sophisticated electronic trading platforms established by prominent derivative exchanges, including the CME’s Globex 2, HKEx’s HKATP, SFE’s SYCOM IV and LIFFE-Connect. However, the motivation for setting up an ETP goes beyond better cost efficiency, faster information dissemination and lower trading error ratios as put forth by advocates of screen trading systems.
To compete in a global market, a futures exchange has to provide a platform that caters to the trading demands of a global customer base that is characterized by high capital mobility. To achieve this, factors like geographical proximity and time zone differential must cease to be binding constraints to an investor wishing to access the trading platform in place. The exchange would have to provide a trading technology that is readily accessible from across vast geographical distances and by various time zones. An ETP facilitates both electronic communications and extended trading hours, thus removing both geographical and time zone constraints.
In that regard, the limitations of a floor-trading platform become apparent. Open outcry requires direct access to the trading pits. As such, participation by a foreign investor is necessarily conducted either through the local brokerage network or by maintaining an investment office in the local vicinity. More importantly, the trading floor is serviced by a small group of often poorly capitalized locals, who supply much needed short-term liquidity to the market through their own trading activities. However, since the locals can only be active for a limited number of hours for each trading day, this severely limits participation by traders from other time zones.
In contrast, the strategic benefits of an ETP are vested in the latter’s ability to facilitate access to the exchange by traders regardless of geographical distance and/or time zone differentials. The positioning of trading terminals in key financial centres around the world linked to a central main system facilitates customer access from across the globe and around the clock. To this point, the competitive position of a futures exchange is increasingly hinging on the technology of its trading platform. The associated strategic considerations and competitive implications are becomingly increasingly relevant to the reconfiguration to an exchange’s existing trading platform.
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The Impact of Electronic Trading on Price Discovery: Evidence from the FTSE 100 Index Futures Market
