Futures Shock: How Frankfurt Got So Far, So FastIgor Reichlin
For Chicago's beleaguered futures exchanges, the Deutsche Terminborse is still too small to pose a competitive threat. But the trend that it represents--innovation, growth, and sympathetic regulation--is potent stuff.
The Frankfurt futures and options exchange is booming. The DTB is one of the first fully computerized bourses in Europe, and it has been pulling in business like a giant electronic vortex--almost too fast for its mainframe Digital Equipment Corp. computer to keep up logging trades. Since opening up two years ago with an options contract on 14 leading German stocks, the DTB has added seven more products, boosted its staff from 10 to 120 and its membership from 52 to 75, and is now moving more than 120,000 contracts a day. Trading in its key product--futures on long-term German government bonds, or "Bunds"--has zoomed in one year from 3,000 contracts a day to 24,000.
BIG EXPANSION. The 17 major German banks--the DTB's founding members--are hell-bent on fast expansion. In August, the DTB lifted the fee it was charging on each $150,000 Bund futures contract. That cost the bourse $1.6 million in lost fees--but the sum was more than paid back from fees from other contracts, as volume surged. Last fall, German banks began to bring their Bund futures trading home to the DTB from London. "We looked thoroughly at our costs and saw that we could do business almost for half the price in Frankfurt," says Gerhard Eberstadt, a managing board member who runs securities trading at Dresdner Bank. Another of the DTB's selling points is speed. An order can be executed by DTB in two seconds. "On the London exchange, this used to take at least 10 seconds," says Ralf Lemster, a trader at Dresdner Bank.
With business booming, the exchange needs all the speed it can get to cope with new investors and new products. For example, a futures contract based on three-month money-market paper is likely to start before the end of the year. A recent change of legislation allowed German insurance companies to invest in futures and options. This has added a huge investment potential to the market and reflects a growing sophistication among German investors in dealing with derivatives. "Germans were late to start catching up, but they're catching up fast," says DTB President Jorg Franke.
But he admits the exchange's growth is limited. "Our software and hardware capacity are still too weak," says Franke, who believes system capacity will be exhausted at about twice current levels. So the DTB has a long way to go to overtake London, where most Bund futures contracts are traded. And the exchange faces another challenge--from over-the-counter trading. "We can't customize products the way OTC trade does," complains Franke. "We have to convince our members to deal through us instead of around us." That is, of course, one of the same challenges facing Chicago.