Another Answer To 24-Hour Trading; Links Don't Work, And No Long Hours

Exchanges have long required that all transactions take place on their trading floors. However, some have decided this requirement is no longer feasible in the face of competition from over-the-counter instruments and exchanges located in other time zones.

The London Stock Exchange took the lead by replacing its floor with a network of screens and telephones. But building a global transaction system is expensive and time-consuming, and companies like Reuters have networks in place that exchanges can tap to trade around the clock.

In a strategic plan recently distributed to members, the CME says a worldwide order-entry and transaction system is a "comprehensive and specific response to the opportunities and pitfalls resulting from the 24-hour trading day."

Although its 1984 mutual offset arrangement with the Singapore International Monetary Exchange inaugurated the first trading link involving a U.S. exchange, the CME has decided the potential of exchange linkages is limited.

One reason volume has been minimal on the CME-Simex and other links is a shortage of independent traders on the foreign commodity exchanges. The Sydney Futures Exchange, which has links with both the Comex and the London International Financial Futures Exchange, has gone so far as to "import" locals from the U.S.

It remains uncertain whether locals will be anxious to lease RDTS terminals for the privilege of trading on PMT. If it fails to attract locals willing to assume risk, PMT may fail for the same lack of liquidity that has hurt linkages with overseas exchanges.

Besides establishing links, an exchange can try to attract foreign orders and maintain its competitive position against overseas markets by extending its trading day.

But the CME strategy paper questions whether the benefits of extended hours outweigh the costs -- including strains on personnel and overhead for trading and back-office facilities.

The CME's archrival, the CBOT, nonetheless remains committed to night trading. "We're in the business of creating a marketplace," says Scott Early, general counsel. "If we keep providing a good marketplace, the world will come to us."

More than 60,000 contracts traded during the CBOT's evening session September 1st and the exchange added Sunday evening hours this weekend.

Sources say the CBOT turned down a chance to offer its contracts via RDTS because it's not interested in automatic execution.

By virtue of being the first to climb aboard RDTS, the CME won certain exclusivity rights. For the first 27 months of PMT, Reuters can't license any other exchange to use RDTS. Subsequently, Reuters can allow other exchanges to use the system to trade contracts that don't compete with CME products.

Final details haven't been hammered out, but according to the document the CME distributed to its membership, RDTS gives the exchange exclusive rights on all futures and options contracts listed on the CME now and in the future, as well as a "broad spectrum" of financial products not traded on the CME.

The deal also gives the CME "general rights of first refusal on new non-competitive contracts" that Reuters might allow other exchanges to trade on RDTS, Serpico says.

However, sources say the agreement doesn't prevent the New York Mercantile Exchange or the International Petroleum Exchange of London from trading energy contracts on RDTS.