Back to the Futures in Chicago

The Windy City's currency market, left for dead, is thriving again

Back in 1999, it looked as if the days of currency-futures trading at the Chicago Mercantile Exchange were numbered. The advent of the euro wiped out 12 currencies at a stroke, and volume at the Merc plummeted by a third from 1998 to 2000. "I left in 2000 because currency trading seemed to be dying a slow death," says Jay A. Deutsch, a currency trader who started trading NASDAQ futures instead.

Well, since January, Deutsch has been back in the currency pits. Volume at the Merc, the world's biggest currency-futures market, was up 35% over the first five months of the year vs. the same period last year. In March, 3.4 million contracts changed hands, the biggest month since trading began 31 years ago. At that lick, volume will top 30 million contracts this year, up from just 19.3 million in 2000.

What's fueling the frenzy? A combination of the dollar's rapid decline and the introduction of round-the-clock electronic trading for currency futures in April, 2001. With orders no longer needing to be called in from Singapore or Frankfurt, the pool of potential investors expanded dramatically. And spreads -- the difference between what traders pay for contracts and what they sell them for -- narrowed considerably, making the market more efficient. "Earlier, there were times when there would be offers and no bids," says Steven A. Greenberg, chief executive of online futures trader Alaron Trading Corp. in Chicago. "But now, markets are tight, and you can always get the price you want." Already, 42% of currency futures are traded electronically, and if that share keeps rising, the Merc may close the pits. Even now, many traders make electronic trades on handheld devices when they're in the pits.

The three-year bear market in stocks sent many players scrambling back to currency futures. "The 2% extra return that mutual funds and hedge funds can get on them is more important today than it was when they made 20%-plus returns on equities," says Richard E. Sears, a managing director at the Merc. In fact, just in the first four months of the year, seven new currency-futures funds were launched, bringing the total to 44, according to hedge-fund newsletter MAR/Hedge.

The action in Chicago isn't mirrored elsewhere. The much larger interbank market in foreign-exchange options, forward contracts, and swaps has declined 7.5% over the last two years following the merger of several large banks.

Will forex futures keep booming? Probably, provided currencies remain volatile and investors don't drift away if stock markets recover. But success invites competition. Two European rivals, the London International Financial Futures & Options Exchange, which has a small exchange in New York, and the Frankfurt-based Eurex, which plans to launch a U.S. exchange early next year, may offer currency-futures contracts. Neither would comment. They could rain on the Merc's party.

By Pallavi Gogoi in Chicago

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