INTERVIEW
This Brave New World
Thomas Donovan And Patrick Catania Of The CBOT
by John Sweeney
Last issue, STOCKS & COMMODITIES presented one take on the future of exchanges during our interview with Leo Melamed, chairman emeritus of the Chicago Mercantile Exchange. Meanwhile, across town at the Chicago Board of Trade, the competition isn't sitting back either. Fresh from wrapping up a major alliance with Eurex, which is arguably Europe's premier exchange, Thomas R. Donovan, president and chief executive officer, and Patrick Catania, executive vice president for business development of the Cbot, spoke with S&C to make sense of all the changes in store for personal traders, floor traders, and institutional traders as the foundation beneath the old ways of doing business disappears. S&C Interim Editor John Sweeney, an open skeptic on the viability of exchanges, found Donovan and Catania in agreement with the Merc on one point: if they don't misstep, they're going to be the leaders in this brave new world. Donovan and Catania spoke with Sweeney via telephone on October 14, 1999.
Patrick Catania and Thomas Donovan
ILLUSTRATION BY CARL GREEN
What is forcing the exchanges to form all these alliances that we've been seeing? What kind of change does all this imply for the exchanges themselves?
Donovan: As the world is changing technologically, the regulatory structure around the world is changing as well. It is allowing people to do things that they have not been able to in the past. The cost of taking on this technology is so great, you have to get yourself into a position where you are sharing cost and you are presenting a common front-end to the user.
What does that mean in practical terms?
With two unrelated exchanges, the user will have to buy new terminals. Naturally, if someone like the Chicago Board of Trade (CBOT) and Eurex, two of the largest exchanges in the world, are on one common front-end, it's going to be a lot cheaper and easier for someone to purchase that to save on expenses and be able to access two markets at the same time. That's a big factor. Not only that, you have a chance to access each other's customer base.
What about for your purposes?
For our purposes, we feel that Europe is largely untapped for some of our products, particularly our Dow Jones products. When we do marketing calls in Europe, one of the things we hear all the time is they can't wait to trade the Dow Jones. Well, it's a lot easier trading it over the CBOT-Eurex screen than other screens.
Why's that?
It's the one-time zone effect -- it's right there in front of them, when they want it. And, quite frankly, it all comes down to cost and access.
If it costs so much to do, then why are so many people trying to open their own exchanges?
I don't think they are trying to open traditional exchanges. A lot of the exchanges starting up are electronic communications networks (ECNs). E*Trade and e-Schwab aren't necessarily exchanges.
What would you call them?
I would call them technology trading systems. We like to call ourselves trade execution systems because that is what we are -- and the newcomers are trying to do it without the regulations that traditional exchanges are under. The traditional exchanges, unlike the new exchanges, are regulated by the burdens that are the result of an antiquated Commodity Exchange Act.
So give me an example of an exchange that doesn't have the same regulatory burdens.
Take Blackbird. They are in North or South Carolina, and they purport to be trading swaps. They transact business on an electronic trading system, which they say is bilateral. Their argument is that they are trading a system that should not be regulated by the Commodity Futures Trading Commission (CFTC), because the CFTC regulates whatever is standardized and traded multilaterally.
So what does that say about Blackbird?
Blackbird is establishing a system where a number of people -- say, 20 -- can put their prices up on the screen, and for different contracts. Those contracts are standardized because they are swaps. The only thing different at the end is someone may sign a credit agreement, but in effect they are all up on the screen. Some will be taken off the screen for one reason or another, so the number of participants may go from 20 to 16. Well, 16 is still multilateral. But in the end, one bid hits the offer and that, they say, is bilateral. And that's what we have in the pit every day.
Our goal is to keep our customers satisfied so they have no reason to go somewhere else. That means low-cost operational efficiency with the integrity of the markets and integrity of clearing. -- Patrick Catania and Thomas Donovan
Excerpted from an article originally published in the February 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.