ICE - Futures Markets' Golden Moment: LIBOR's Demise And Electronic Trading Change The Game

2024-02-08 11:45:42 ET

Summary

• Competition between the dominant futures exchange and the major securities exchanges is driven by two new factors -- the death of LIBOR and the competitive insignificance of trade matching.
• The death of LIBOR exposed the vulnerability of futures exchanges to the failed viability of a spot market used to settle a futures contract.
• Electronic trading has made trade matching identical across exchanges, shifting the competitive focus of exchanges to listing, clearing, and functionality.
• Financial futures exchanges may become more important than securities exchanges, but they must innovate in clearing, listing, and especially functionality to succeed.

Introduction

Two events have reshaped the economics of financial exchange management.

First, the death of LIBOR revealed the exposure of futures exchange major markets to sudden death due to futures exchanges' lackadaisical attitude resulting in their failure to protect the viability of the spot markets used to settle their important futures contracts.

Second, electronic trading made trade matching identical from one exchange to the next and a nonissue in determining the cost and value of exchange operations. Exchanges can now only compete in once-ancillary issues: listing, clearing, and functionality. This had a particularly telling effect on stock exchanges which do little else than match trades. ...

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