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Articles

Globex System is Vexed by Low Trading Volume,
Overseas Competition and Technological Glitches
by Jeffrey Taylor 12/14/92 - reprinted with permission of The Wall Street Journal

Nearly six months after its launch, the highly touted Globex after-hours futures trading system is plagued by low volume, stiff competition and technological glitches.

The system, intended to be the world's first truly global electronic trading network, is a joint venture between the Chicago Mercantile Exchange, the Chicago Board of Trade and Reuters Holdings PLC. Reuters put up the vast majority of the estimated $70 million to get the computerized system up and running. The Merc and CBOT offer their most popular contracts - including interest-rate and currency futures and options - for purchase and sale after regular trading hours on Globex.

But so far, after-hours trading is slow. Last month, Globex trading averaged only 2,771 contracts a night; that's a drop in the bucket compared with the 551,854 contracts a day that trade during the regular trading session at the Merc, and 596,709 contracts a day at the CBOT. And Globex's November average nightly volume was down 9% from 3,041 contracts a night in October.

"It looks as if it's just nickel-and-dime retail (small investor) business so far," says David F. DeRosa, portfolio manager at BEA Associates, a New York investment firm which manages more than $16 billion in assets. To become the world's favorite after-hours futures market, "you want to attract institutional business, so that there's a big flow through the system; you want to get overseas business," Mr. DeRosa says. But Globex's low volume "shows they're not getting the trading they need from institutions."

Leo Melamed, chairman of the Merc and CBOT joint venture board that oversees Globex, acknowledges that it is off to a slow start. "Clearly, there are problems," he says. "It's a complex system." But he argues that six months of Globex trading isn't a fair test. The system can't be declared a success or a failure, he says, until it has operated for about three years.

Yet the six months in which Globex has been operating have shown that it faces big hurdles. For the system to provide any kind of adequate return on its startup investment, Globex trading volume must swell to many times its current level. And for that to happen, traders have to be confident that Globex will provide the kind of easy access that can already be found in busy futures pits both here and abroad.

Even the CBOT, one of the partners in the joint venture, concedes that it sees Globex as nothing more than an adjunct to its traditional exchange-based trading.

"There's no question that the commitment of the CBOT is to our open outcry method of exchange-based trading," says Dale Lorenzen, first vice chairman of the CBOT. "I just don't think (Globex) is ready to take the volume that we can generate with open outcry. Any electronic trading system is several years away from major success."

A lack of trading liquidity and stiff competition from foreign exchanges are the biggest hurdles facing Globex. Big investors in Europe and Asia typically use Merc and CBOT products such as Eurodollar and Treasury-bond futures and options contracts to offset the risks of their holdings in dollar-denominated securities. The Globex system offers these products after the Chicago markets close through a network of about 250 computer terminals in Chicago, New York, London and Paris. But the banks, trading firms and insurance co. that use futures contracts tend to send their orders to the biggest, most liquid markets they can find, which during off-hours in Chicago are foreign markets. For example, the biggest after hours market for Eurodollar futures contracts, a hugely popular product that tracks short-term interest rates, is the Singapore Monetary Exchange, also known as Simex.


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