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20 Years of Electronic Trading on CME Globex

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  • 1. ELECTRONIC TRADINGTwenty Years of CME GlobexJUNE 21, 2012John W. Labuszewski Lori AldingerManaging Director ManagerResearch & Product Development Research & Product Development312-466-7469 312-930-2337jlab@cmegroup.com lori.aldinger@cmegroup.com
  • 2. Electronic trading systems have changed the face of convenience for currency traders, CME Groupthe exchange-traded derivatives industry on a scale leadership had a larger vision and believed thatthat was virtually unimaginable some twenty years electronic trading could be made to serve as theago. The advantages of electronic trading include main source of distribution for all of Exchange’sease of access from virtually anywhere worldwide varied product lines.almost 24 hours a day. Breakthrough ProductThis increased participation generally has resulted inenhanced liquidity and soaring volumes. Let’s take By the late 1990s, the U.S. stock market had beena retrospective of over twenty years of experience on an extended 15-year rally. As a result, thewith the CME Globex electronic trading system. original S&P 500 futures contract had grown quite large in terms of notional value and was beginning % of CME Group Volume on CME Globex to soar out of reach for many prospective traders. 100% Thus, CME Group developed a smaller sized contract 81% 84% 90% 80% 83% traded exclusively on CME Globex. E-mini S&P 500 71% 78% 80% 72% futures were 1/5th the size of the standard S&P 500 70% futures contract and offered only on the CME Globex 58% 60% system. 50% 44% 40% 35% Initially, the bulk of the trade was transacted by 30% traders equipped with CME Globex systems situated 20% at the periphery of the pit conducting arbitrage 20% 15% 8% between the “bigs” and the E-minis. The E-mini S&P 10% 4% 0% 1% 2% 0% 1% 1% 500 contract was the “breakthrough” product for 0% electronic trading at CME Group. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 The appeal of electronic trading is linked to the convenience of immediate fill reports and the abilityAfter-Hours to trade on an equal footing with anyone in the world. Where once the E-minis followed theChicago Board of Trade (CBOT) introduced evening standard sized contracts, the situation is reversedfloor trading in the late 1980s to address and E-minis represent the main liquidity source.international demand for Treasury futures in non-U.S. daylight trading hours. But the strain of trading Open Access Policyinto the night was more than many traders couldhandle. The fundamental raison d’être of any exchange is simply to allocate access to the trading process.Thus, the Globex concept was conceived by CME When trading is conducted in an open outcryGroup leadership in 1987 as a “low-impact” means environment, direct access is restricted by theof providing after-hours market coverage. Attention physical confines of the pit. There are only so manyfocused on the fact that the epicenter for interbank traders who could be shoehorned into a pit and socurrency trading is in London where much trade is memberships were sold to the highest bidder as aconcluded while traders in Chicago are asleep. If means of allocating access. But electronics allowscurrencies could be traded “on-the-box” during exchanges vastly to expand direct access to thethese hours, CME Group might see increased order trading process.flows. Thus, the most important milestone in the history ofIt took until 1992 when the technologies could the CME Globex system occurred in late 2000 whenactually become operational in the context of CME Group leadership implemented an “opencurrency products. Initial volumes were modest but access” policy. This meant that customers couldinterest was keen and the system grew steadily in trade directly on CME Globex provided that theirpopularity. While the system was initially sold as a clearing firm provided a financial guarantee for their2 | Twenty Years of CME Globex | June 21, 2012 | © CME GROUP
  • 3. trading activities. Thus, customers were no longer Still, the potential for electronic trading has barelyrequired to route their orders through a broker via scratched the surface. Further advances in bothtelephone. distribution and system functionality may be anticipated.Vast numbers of customers trade directly on Globextoday, often through portals provided by their We expect to place more hubs in the world’sbrokers or through commercially available developing trading centers. Options remain anIndependent Software Vendors (ISVs) such as electronic trading holdout to the extent that theTrading human hand still Notable Milestones in CME Globex HistoryTechnologies, Pat- provides added valuesystems and others. 1987 Globex concept approved for after-hours trading that is difficult toThis open access 1992 Currency and interest rate products launched on CME replicate on the boxpolicy generated Globex given the almost 1995 Stock index products launched on CME Globexlarge-volume infinite variety of 1997 • E-mini S&P 500 futures launchedadvances and a • Monthly CME Globex volume exceeds 100,000 for first option combinationsmigration from the time that may bepit to the box. 1999 Side-by-side Eurodollar trading introduced pursued. But theCME Group has 2000 Open access policy implemented computer is catchingtraditionally 2002 Average daily volume exceeds 1,000,000 for first time up with the human 2003 • Implied spread functionality introduced in Eurodollarmaintained a policy hand and we expect futuresof “let the market • International access hubs activated to see optionsdecide” between 2004 • CME Globex volume exceeds pit volume for first time migrate to therouting their orders • Eurodollar options matching engine integrated with screen in the future.to the pit or to the Globex 2006 NYMEX products listed on CME Globexscreen. Many The availability of 2007 • CBOT products listed on CME Globex after mergermarkets were offered • CME Globex volume exceeds 1 billion electronic tradingon a “side-by-side” 2008 CME Globex and BM&F’s electronic distribution network technologiesbasis in both an open connected for routing electronic orders on both provides a boom tooutcry and an exchanges. new productelectronic trading 2009 Dubai Mercantile Exchange Oman Crude Oil futures development, launched on CME Globexformat. allowing futures to 2010 CME Group’s Global Command Center (GCC) opens 2012 CME Group Co-Location Services launches, allowing for be traded in novelCustomers have lowest latency connection possible and inventive ways.indeed decided as Where once a newthe plurality of all CME Group volume is conducted product offered in a pit environment needed toon Globex today. Even after implementation of the attract significant outside customer flow almostopen access policy, access is not unlimited. System immediately to support a handful of liquiditydemands are increasing exponentially given the providers, electronic trading provides “cyber locals”widespread application of algorithmic execution the ability to make markets on an automated basis,technologies and black-box trading. CME Group essentially extending the “shelf life” of new productsmanages “bandwidth” by throttling message traffic. almost indefinitely and thereby promoting novel product developments.What next? Finally, end users are working just as diligently uponCME Globex currently is capable of processing in extending their electronic trading capabilities as theexcess of 9 billion quotes per month with an exchanges. While algorithmic and so-called highestimated average response time of less than five frequency trading (HFT) has become somewhatmilliseconds. The system is currently distributed controversial in recent years, we believe that suchwith customer-managed connections to data hubs in functionality and activities serve to enhance liquidityLondon, Mexico City, Milan, New York, Paris, on the system, which serves all market participants.Singapore, São Paulo, Seoul and Kuala Lumpur. Thus, we foresee increased demands on bandwidth as automated and algorithmic trading becomes the3 | Twenty Years of CME Globex | June 21, 2012 | © CME GROUP
  • 4. preferred methodology of institutional traders,supplementing and possibly even supplanting “pointand click” trading.Copyright 2012 CME Group All Rights Reserved. Futures trading is not suitable for all investors, and involves the risk of loss. Futuresare a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than theamount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affectingtheir lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade.All examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investmentadvice or the results of actual market experience.”Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within themeaning of section 1(a)12 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of acontract’s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, tradersshould only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted toany one trade because they cannot expect to profit on every trade.CME Group is a trademark of CME Group Inc. The Globe logo, E-mini, Globex, CME and Chicago Mercantile Exchange are trademarks ofChicago Mercantile Exchange Inc. Chicago Board of Trade is a trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is atrademark of the New York Mercantile Exchange, Inc.The information within this document has been compiled by CME Group for general purposes only and has not taken into account thespecific situations of any recipients of the information. CME Group assumes no responsibility for any errors or omissions. Additionally, allexamples contained herein are hypothetical situations, used for explanation purposes only, and should not be considered investment adviceor the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are supersededby official CME, NYMEX and CBOT rules. Current CME/CBOT/NYMEX rules should be consulted in all cases before taking any action.4 | Twenty Years of CME Globex | June 21, 2012 | © CME GROUP