Do futures markets run monopolies? Depends on which chief executive officer you ask.
At an industry conference yesterday, the CEOs of Nasdaq OMX Group Inc. and CME Group Inc. squared off in a debate over whether the business models of the dominant futures exchanges -- where everything from bets on interest rates to oil, wheat and hogs trade -- are aligned with customers’ best interests.
The major operators like IntercontinentalExchange Group Inc., CME Group and Deutsche Boerse AG make investors enter and exit each trade on the same exchange, a model known as the vertical silo that effectively blocks rivals from stealing market share for their popular products. The European Union in January loosened that grip by approving rules that let investors open and close positions on different venues.
Nasdaq OMX Group Inc. CEO Robert Greifeld was asked yesterday about the vertical silo and whether it hurts investors.
“Monopolies are great if you own one,” he said during a panel discussion at the annual Futures Industry Association conference in Boca Raton, Florida, paraphrasing a quote he recalled hearing from an investor. His exchanges don’t use this system. “We have yet to find a customer who is in favor of the vertical model,” he said.
Futures markets have historically owned their own clearinghouse, which is where all trades handled by the exchange are processed and collateral is posted to guarantee them. That’s the mechanism through which futures exchanges can maintain monopolies on the contracts they offer. Other capital markets aren’t like that. For example, a central clearinghouse handles all trading of U.S. stocks and equity options.
The world’s four biggest exchange owners run futures venues. Chicago-based CME Group is the largest at $26 billion in market capitalization, followed by Atlanta-based ICE at $24 billion, Hong Kong Exchanges & Clearing Ltd. at $18 billion and Frankfurt-based Deutsche Boerse at $15 billion. Nasdaq OMX of New York is in seventh place at $6.7 billion, according to data compiled by Bloomberg.
Phupinder Gill, CEO of CME Group, the world’s largest futures market, said product innovation would wither if the current futures model was undone. That’s because any contract that CME Group creates would be available for competitors to list, too, he said.
“You capture no reward for your hard work,” he said yesterday at the FIA panel discussion. “Capitalism and making money is fundamental.”
Greifeld took issue with that. “I fundamentally disagree,” he said, adding that futures exchanges could be given something like six months of exclusivity for a product as an incentive to innovate.
Jeff Sprecher, the CEO of ICE, which became the second-largest exchange owner last year after purchasing NYSE Euronext in November, said the recent revisions to Europe’s market law, known as Mifid, are too late.
“This Mifid legislation has been in conversation for years, so it’s trying to bring competition to a market that’s highly competitive,” he said.
Sprecher’s company created its own derivatives clearinghouse in London in 2008 after initially using LCH.Clearnet Ltd. Sprecher said the growth of his exchange, ICE Futures Europe, was due to owning the clearing operations.
“It was very hard to align our own goals as an exchange with the goals of an independent clearinghouse,” he said.