NEW YORK CITY, N.Y. – The traders on the inside of North America’s small commodity exchanges may lock in capitalist combat, but they don’t dislike their competitors.
And between the small exchanges collegiality exists even though worldwide competition is increasing and there is growing pressure for industry consolidations.
“There’s always been a bit of a fraternal feeling amongst the exchanges,” said Tim Barry, vice-president of product development at the New York Board of Trade.
“That’s not to say that we don’t compete and wouldn’t be willing to compete, but we serve some similar functions to similar types of market users and many times there’s actually an overlap (that helps multiple markets).”
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Globalization and the development of electronic trading have reduced the importance of
location as it relates to market power.
Electronic trading makes it easier for exchanges to build and launch contracts that their competitors offer than it would be if they had to attract the scores of traders needed to establish an open outcry pit.
Industry behemoths like the Chicago Board of Trade and Chicago Mercantile Exchange dwarf their smaller colleagues like the NYBOT and the relatively puny Kansas City Board of Trade, Minneapolis Grain Exchange and Winnipeg Commodity Exchange.
But Chicago has not moved to kill off its smaller brethren, and has, in fact, helped them modernize and become more efficient by using its electronic trading system.
For New York’s Barry and Jeff Borchardt, the president of the Kansas City Board of Trade, co-operation among exchanges is a form of consolidation that may keeping the smaller ones alive, viable and prosperous.
“We’re blessed that we have a market niche that we fill that not only does not compete with other exchanges, but actually complements other exchanges,” said Borchardt.
The corn contract that the CBOT trades does not leave a lot of room for competing contracts because corn varieties vary little. The wheat contracts in Chicago, Kansas City and Minneapolis don’t compete with each other, and even result in extra trading as people arbitrage one against the other.
“CBOT trades the corn, but wheat is not just wheat,” said Borchardt. “There are different varieties (and industrial uses for) wheat. We have 150 years of differentiation.”
That also applies to some of the other contracts at the North American agricultural exchanges. Winnipeg’s canola contract does not directly compete with the contracts at other exchanges and NYBOT’s larger sugar, coffee, cocoa, cotton and frozen concentrated orange juice don’t have North American competition.
NYBOT has competition for some of its contracts with an exchange in London, England, but they have been sharing the market for a long time and both are surviving.
While the present roster of North American exchanges seems settled, consolidation is still in the air, and NYBOT is the product of earlier waves of industry rationalization.
At one time there were independent exchanges for most of the NYBOT’s commodities. The New York Cotton Exchange formed in 1870, the Coffee Exchange of the City of New York formed in 1882, and the New York Cocoa Exchange formed in 1925. The coffee exchange introduced a sugar contract in 1914. The cotton exchange added a frozen concentrated orange juice contract in 1966.
In 1979, the Coffee, Sugar and Cocoa Exchange was formed by a merger and in 1998 the cotton exchange merged with coffee, sugar and cocoa to form the NYBOT.
Barry isn’t sure whether more consolidation is necessary. When he entered the business in 1980, there were five futures exchanges in New York. Now there are two, he said.
But there is pressure for the smaller exchanges to become more user-friendly for investors.
“From the standpoint of the (commodity index funds), they would like to see more standardization.”
Having to follow different margin requirements and membership rules at multiple exchanges is frustrating for the funds that want to move into and out of markets with the minimum
annoyance.
But the exchange’s other users don’t want to see amalgamation occur if it will hurt the contracts they rely on.
“Their concern is that their market, that is very large to them, might seem very small as the exchanges get larger,” said Barry.
“The needs of their marketplace might not be as well served if they’re one of many contracts competing for attention and resources in a larger exchange.”
What is happening now, and what may eliminate the need for future mergers or takeovers, is the steady integration of the smaller exchanges into the Chicago trading system. The CBOT’s electronic platform is now used by a number of exchanges including Winnipeg, and there are other arrangements such as Kansas City providing the backroom processing for Winnipeg.
For its electronic trading, which applies to only a few of its products, the NYBOT uses the CBOT platform. Barry thinks new growth may come from integrating markets, not merging them.
“We’re not looking to take them over or be taken over. We’re looking at how we can work co-operatively in a way that serves the needs of the market,” said Barry. “I definitely see more of that coming.”
