It is no secret that the CBOT is facing competition out of Germany, but we have seen little, if any, impact. I would like to share a few numbers with you:
- Nearly 100 percent of all two-year U.S. Treasury note activity takes place at the CBOT.
- Nearly 99 percent of volume in five- and ten-year U.S. Treasury note volume takes place at the CBOT.
- In total, the CBOT commands more than 99 percent of U.S. Treasury futures volume and close to 100 percent of options on those contracts.
- Average daily volume in our U.S. Treasury complex is up 45 percent so far this year, with an average of 1.6 million contracts changing hands every day at the CBOT.
In a desperate bid to steal some of the CBOT's highly valued liquidity, our German competition reduced exchange transaction fees its first week of operation. It is my belief that this reactive decision signals a management team who underestimated the challenge of competing with the CBOT and our superior market model.
To begin with, there is more to the "cost of trading" than exchange transaction fees. Liquidity is the key to determining the ultimate cost of a transaction, and as I just mentioned, the CBOT's markets are among the world's most liquid.
The CBOT offers highly competitive transaction fees and provides a trading environment with attributes unavailable elsewhere - including full transparency, true price discovery, cutting-edge technology and innovative products designed to meet our customers' needs. Those attributes give CBOT the edge over the competition and will allow the CBOT to overcome challenges from those who mistakenly believe they can win liquidity simply by slashing prices or catering a market model to a few select users. As a designated contract market overseen by the CFTC, the CBOT has the responsibility to serve the broader needs of ALL users and do so in a manner that is conducive to true price discovery. We take that responsibility very seriously.
All CBOT market users have the opportunity to compete, in the open, for any bid or offer posted. Trading of our U.S. Treasury products is conducted in a transparent environment for all to see - no ghost ticks, no netting of prices, no payment for order flow, no conflicts of interests, no opaque market practices. Our customers value this clarity and have confidence in the fact that they are not going to get blindsided by market fluctuations sparked by back-room deals reported to the exchange hours, or even a day, later.
The primary function of the CBOT, or any marketplace, is to gather a deep pool of liquidity, to provide a forum for price discovery, and to distribute those prices. Internalization - and other practices such as payment for order flow and the "call around" market employed by other exchanges - are completely incompatible with the very reason exchanges exist, because they cripple price discovery and distribution.
At the CBOT, transparency has been a pillar of our existence since our exchange was founded more than 155 years ago. Transparency makes price discovery faster and more efficient, simply because there are no smoke and mirrors to navigate.
The futures industry has worked hard during the last two decades to raise its profile, address opaque market practices and enhance market supervision. Various markets came together to form the National Futures Association to provide self-regulation that supplements the roles of the CFTC and the exchanges. Specifically, we have closed bucket shops, we have established rules on sales solicitations, and we enforce the highest standards of market oversight and integrity within the financial services industry. These efforts have led to increased investor confidence, which has fueled unprecedented growth, and I would argue that any compromise in the values we have worked so hard to establish would be disastrous.
Aiding our efforts to bring you a transparent marketplace is the CBOT's superior electronic trading platform. Our platform is the first system able to handle complicated futures, options and combination orders in a fully electronic, and transparent, environment.
Furthermore, the system is more reliable and faster - CBOT's new electronic platform, with its T-1 connections, is 2400 percent faster than the 64-K lines the exchange used with its previous system.
I probably don't need to explain to you the value in the dynamic price quoting offered by our electronic trading platform. Rather than providing an incomplete snapshot of the market every couple of seconds, CBOT's electronic platform allows us to bring you real time, streaming prices. Our customers see every single bid and offer that is out there, rather than just a sampling of them.
Frankly, the difference between our platform and others currently in use is a classic case of old versus new. Our electronic platform features open architecture, which enables us to add to and enhance the system as customer demand evolves and as the marketplace continues to grow. So-called legacy technology is more difficult to adapt, particularly when our dynamic industry is changing so rapidly.
In addition to the new technology, the CBOT is focused on providing you with the very best risk management tools necessary to succeed. To that end, the CBOT has directed considerable effort toward the creation of new products.
Just a few weeks ago, the CBOT announced it would launch Bund, Bobl and Schatz futures. These contracts are the result of extensive conversations with active traders of German debt. In response to user demand and consistent with our goal of developing innovative products that provide value to the broader marketplace, the CBOT decided to create the world's only cash settled German debt futures contracts. In addition to the convenience and efficiency provided, we believe that the design of CBOT's cash settled contracts will address existing concerns associated with expiration of the physically delivered contracts and at the same time settle at their appropriate price.
Bund, Bobl and Schatz futures are a natural extension of the CBOT's fixed-income product offerings. The new products provide trading opportunities and risk management resources across the German yield curve and will be available during both European and U.S. trading hours. The CBOT contracts will offer the smallest minimum tick size of any listed German debt futures contract, and exchange transaction fees will be the lowest in the marketplace.
The CBOT recently launched in February options on the mini-sized DowSM futures and futures on the Dow JonesSM Total Market Index, and we plan on introducing several other new products this year.
At the CBOT, innovation has fostered success; we are focused on developing new products and programs that meet and/or exceed the risk management needs of our customers. We currently face competition that seeks to simply imitate our success, but if past history is any indication, that is a recipe for failure. Without innovation or genuine focus on the broader needs of the market, derivatives exchanges risk stagnation, which is simply unacceptable to futures markets users.
The CBOT made great strides over the last 30 months to provide a market model that is flexible and responsive to the needs of our customers within a dynamic marketplace. Our value propositions are many: The CBOT offers the world's most liquid, transparent markets, supported by premier technology. Our markets are easily accessible and transaction fees priced competitively. What is more, we have relied on our track record of innovation to create new products that respond to customer and market demand. While other exchanges base their business model on domination and opaque market practice, ours is based upon cooperation and transparency. While others cater to the needs of a few, we provide an open accessible marketplace that addresses the needs of all users. The CBOT will continue to foster a market model that creates value for all users and I believe this focus will insure long-term success for our exchange.
Thank you.
