Chicago Board of Trade Automates with Euro Rival

FRAMINGHAM (07/13/2000) - The Chicago Board of Trade (CBOT), the world's largest remaining open-outcry derivatives exchange, plans to kick off testing of its new electronic-trading system next week.

The new system, developed in partnership with Eurex, a rival derivatives exchange owned by Frankfurt-based Deutsche Borse AG and Zurich-based SWX Swiss Exchange, will let traders see Eurex and CBOT data on the same screen and will permit higher trade volumes than CBOT's current electronic system, Project A.

The testing, set for launch today and scheduled to go live this quarter, comes at a time of massive restructuring for CBOT.

Last month, more than 90% of CBOT members voted in favor of splitting the exchange into two for-profit companies - tentatively called CBOT and eCBOT - in a first step toward a possible initial public offering.

Like the New York Stock Exchange, CBOT is owned by its members. It doesn't offer a place to sell actual stocks, however. Instead, CBOT lets members trade contracts for the future purchases of products like agricultural commodities or U.S. Treasury bonds.

If CBOT becomes a for-profit company, it will be able to move more aggressively toward electronic trading, said Dana Stiffler, an analyst at Newton, Mass.-based Meridien Research Inc.

Currently, only 5% of CBOT trades are made electronically because the exchange has priced electronic trades several times higher than traditional trades - a deliberate tactic to keep business from being taken away from CBOT's floor-trader members.

According to CBOT spokeswoman Katherine Spring, members pay 3 cents per trade ($1 for retail customers) using the traditional open-outcry system, compared with 23 cents ($4 for retail customers) on the old electronic platform, which is known as Project A.

"But the local [member] firms have become less and less vocal because they realize that this is the way it's going to be," Stiffler said.

With the restructuring, said Spring, eCBOT would be able to set its own prices for electronic trading.

The new system - and the planned shift to decimal-based pricing next April - are expected to generate more volume for the exchange. According to Spring, Project A wasn't capable of handling higher volumes. It would have cost CBOT $47 million to revamp it. So CBOT instead decided to go with the Eurex platform for $50 million.

"The Eurex system was the most scalable and had a proven track record," Spring said.

Currently, 75% of CBOT's volume is from member firms that belong to both CBOT and Eurex.

The Eurex platform, which has been in development since the fall, allows members of the world's two largest derivatives exchanges to be on screen at the same time, and it lets them pass the information on to their clients.

The old system, on the other hand, required a dedicated terminal, which took up more space. It also restricted the ability of traders to customize front ends to give clients information, Spring said.

After the system goes live, the next step for the two exchanges will be an alliance with an as-yet-undetermined partner in Asia, according to Spring.

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