Chairman Neubauer Remarks follow:
Remarks by Chairman Nickolas J. Neubauer
International Derivatives Week Luncheon
London, England June 19, 2002
On behalf of the members and employees of the Chicago Board of Trade, I want to thank you for coming here today. It is a pleasure for me to represent them and to talk to you during International Derivatives Week about the progress we are making at our exchange. This also gives me the opportunity to thank you for the business you bring to our markets every day.
We want to continue to work hand-in-hand with you to ensure that you have full faith and confidence in our ability to provide liquid and efficient markets, and I want you to know that the Chicago Board of Trade remains committed to providing you and your customers markets with liquidity, flexibility and integrity.
David Vitale, who is here with me today, and I want you to know that our dialogue goes beyond this meeting. While we may not agree with every single suggestion you make, you will find an "open door" policy at the Board of Trade, because we know you want the exchange to succeed as much as we do.
Personally, I have taken a more hands-on approach with our FCM Committee to ensure that they stay fully abreast of exchange matters and have appropriate input prior to the actions taken by our Board of Directors.
We have accomplished much at the exchange since I spoke to you last year, and in highlighting some of these actions, I want to emphasize that they could not have occurred without the many efforts of our members, member firms, feedback we have received from our customers, and the fine work of our management team.
In 2001, we had our second highest volume year ever, and so far in 2002 we are on track for an even better performance. The uncertainty in the global financial markets has caused investors to increasingly seek the safe haven of our treasury complex, particularly in our 10, 5 and 2-year notes, resulting in large volume increases in both the open auction and electronic marketplaces.
Last year I told you the exchange's finances were sound. This year I can tell you they are even better, as we are experiencing continued strong growth in terms of revenues and net income while controlling the expense side. Our unrestricted cash balance has grown to nearly $50 million, which will allow us to make further investments in technology and product development this year.
We made major technology enhancements to our open auction trading floor last year, and we plan to invest another $24 million in technology this year to make these markets more efficient for you. We have created a high tech, cost-efficient trading arena that embodies the best of both worlds.
Picture this. A trading arena that enables customer orders to be executed in the best-priced platform at that time. FCMs have their sales staff equipped with a/c/eSM screens constantly monitoring price and depth of market so that their customers are provided the best service possible. Local traders flashing electronic orders to their desk staff for entering on a/c/e. Their desk staff constantly communicating with them via hand signals, headsets and wireless technology. Other local traders keeping cross-platform prices efficient by using wireless vendor order entry systems linked to a/c/e.
What's also different in this picture? Very few non-sales producers on the trading floor. Very few runners, and very few paper tickets.
The vision I described for you is our objective in making our customer choice of platform strategy a true reality, and we are making great progress in reaching this goal for you and your customers.
The Chicago Board of Trade is also realizing its goal of becoming a more product-oriented enterprise. We are introducing and marketing new products like swaps, and focusing more attention to our equity complex. We are working closely with Bill Rainer and his team at One Chicago on the pending launch of single stock futures. Most importantly, we have added marketing and business development expertise to our management team with people like Bernie Dan and Marty Reiner, and their leadership will strengthen our efforts in this area. Marty is with us today, along with Mary McDonnell who heads up our electronic trading division, and they are both available to answer your questions.
Finally, under David Vitale's leadership, the Chicago Board of Trade is being managed more like a business and taking a more serious approach to customer service, which is in part why we are hosting this luncheon and reaching out to you.
I believe in strong customer service. I know customer orders are the reason why the Chicago Board of Trade exists today. I recognize the value of the relationship you and your firm have with our exchange, and as long as I am Chairman, I am committed to strengthening those relationships.
Our members are dedicated to making deep, liquid markets. If we can continue to make our markets as efficient and cost-effective as possible, we can provide even better service for you and enhance trading opportunities for our members. This is something that is good for everyone.
My vision of the Chicago Board of Trade has not changed from when I spoke here last year soon after my election as Chairman. We want to increase the overall value of the exchange, whether that means an electronic future, open auction, or some combination of the two.
We want to increase both member profits and exchange profits. Member profits come from being traders, brokers, FCMs or local clearing firms. These profits are not reflected in the CBOT's books at the corporate level, but if our members and member firms are successful and profitable, then the exchange will profit. Under our strategy, we must and will look at ways to enhance profits in both areas if we are going to succeed.
Our plan is to offer and support two platforms, and give our customers a choice between electronically assisted and efficient open auction, and an electronic platform. We recognize in London and Europe many users are more active in our electronic platform, and we are constantly reviewing all of our rules and regulations to make sure both trading platforms are comparable and favorable to our customers. Our pricing schedule is designed to balance the two platforms, with the goal of creating a single, deep pool of liquidity. Based on our volume growth this year, our strategy is working.
We know it is working because the percentage of customer trade is about the same on both platforms and runs about 20 to 25% on each. Most of the electronic trade comes from member and proprietary accounts that use both platforms in their trading strategies.
Open auction is an essential part of our strategy because it ensures the transparency and communication necessary for the level playing field we offer the users of our markets. The information flow in a central open auction pit is greater than what exists in a screen environment, and this point has been made in academic studies. "Who's doing what?" for example, is asked again and again by our customers, and such information creates tighter markets and wider participation.
Our watchwords remain "Integrity, Liquidity, Flexibility." Pre-execution communications are strictly limited so that they do not become "pre-arranged trades" that disadvantage the market. We stand for the immediate reporting of all trades so that all market participants are treated fairly.
Contrast what we have at the Board of Trade with the numerous dot.coms or electronic platforms that were supposed to take our business away, none of which have time-tested surveillance programs like ours, the price transparency and daily mark-to-market found in our markets, or a triple AAA credit rating backing of all their trades. My point is that it seems to me that the two platforms together offer customers a choice, and ensure the market transparency and fairness that is the hallmark of exchanges like the Board of Trade.
With efficient, reliable markets comes a renewed focus on products. The big news on the financial futures front is our new CBOT interest rate swaps complex. As one of our customers so aptly put it, we live in a LIBOR world. LIBOR forms the basis for most commercial and industrial borrowing and lending in the U.S. these days. The mortgage markets and even the tax-exempt bond market have largely shifted to LIBOR benchmarks.
It follows that financial risk managers need cost-effective LIBOR-based risk management tools. The message from our members and their customers was clear; develop swap futures contracts.
Well, one thing I believe we do well at the Board of Trade is listening to our customers. We listened in this case and last October launched our 10-year swap futures contract. I am happy to say that volume has been growing steadily and open interest is over 40,000. On Friday, we plan to launch 5-year swap futures, and we look forward to building up this complex even more.
We recognize that market innovation cannot stop with the design and launch of a contract. Virtually every analysis of every economic sector in recent years includes discussion of shifting capital structures. In our own part of the financial world, you are well aware that consolidation has resulted in there being fewer FCMs than there were 10 years ago. There are many fewer primary dealers in the government securities market. And such key functions as mortgage servicing have undergone significant consolidation.
Due to developments such as these, the Chicago Board of Trade has introduced another innovation, the Designated Market Maker, or as we often say, a designated liquidity provider, to establish liquidity in new contracts.
Liquidity always has been important to our exchange and to you. It allows you to transact with minimal or no price slippage. It allows you to get into or out of the market when it is convenient for you. It helps control costs. So to help market users in all of these regards, the Board of Trade has contracted with ABN Amro to stand in our swaps futures pit as a designated liquidity provider.
This concept is new for us, but we are growing accustomed to it based on the positive results we are seeing so far in the complex. As I noted, volume and open interest are up significantly since the introduction of a liquidity provider. Not so long ago, one market participant did a swap futures trade with a $400 million notional principal at one price. Trades with $100 million to $250 million notional have become common. The March-June and June-September rolls have gone smoothly. Users of swaps futures could get out of their positions easily and for reasonable cost. You cannot always say that of the over-the-counter markets in mortgages, corporate bonds or swaps.
ABN Amro always has a trader in the pit that is prepared to make two-sided markets with a specified bid-ask spread or better, and at a specified size or better. In short, this represents committed capital as well as a commitment from us to serve you and your customers better.
Another product complex to which we will be devoting more resources is our Dow Jones futures. I am excited about the potential that exists for this complex, particularly when we have the opportunity to partner with such a strong global brand as Dow Jones. We have worked aggressively to ensure the continued liquidity and growth of this complex, as we want it to succeed, and we are pleased that we were able to renew our licensing agreement with the Dow Jones Company for another five years.
We are going to commit resources to ensure that this complex is marketed effectively, and we have incorporated state-of-the-art technology in the Dow pit and on our electronic trading platform in order to provide quick and accurate information to our customers. I believe if we do our job right, we can build this contract to average daily volume levels of 50,000 contracts. With the e-mini Nasdaq generally averaging over 150,000 contracts, I think this is an achievable goal for the Board of Trade and I am committed to working with Bernie Dan and his team, as well as with the Dow Jones Company, to further enhance this complex and provide additional trading opportunities for all types of investors.
The retail market is emerging as a major part of our customer base, and to draw more business from that sector, last September we launched a Mini-sized DowSM futures complex.
After listening to our customers, we decided to add an additional mini-sized Dow with a $5 multiplier which trades only on our electronic platform. When I look at the volumes traded on the e-mini S&P and Nasdaq, I truly believe that we can achieve decent volume in our e-mini Dow contract, which would benefit both the complex and the exchange.
Again we have made an extra effort to support this market. We have appointed two electronic market makers - Susquehanna International Group and Bear Hunter Structured Products - to provide liquidity. On June 4th we set a record with over 11,000 contracts traded. We believe this is solid performance at an early stage and we look forward to building on this momentum in the coming months.
Both the size of our mini-sized Dow contracts and the means of distribution make this complex far more accessible to the large audience of day traders. Equity day traders are realizing the leverage benefit that futures have over cash products. Additionally, the ability of selling short as easily as buying makes futures the perfect trading vehicle for the customer sector.Also, when we decommissioned the MidAmerica Exchange last year, we converted the most viable financial contracts into mini-sized contracts traded exclusively on our electronic platform. Further evidence of the retail interest in futures trading is indicated by the fact that we are getting close to 100,000 hits a day on our web site for our online tutorial on how to trade futures.
The importance of the LIBOR-based swap curve in all areas of finance, and our affiliation with the Dow Jones brand has renewed the Board of Trade's focus on extending the global reach of some of our more traditional contracts. Of course, none of this works if we do not take care of the distribution side of the equation.
Our global reach has broadened steadily with our electronic trading platform. When we launched trading on the platform with Eurex, we had 21 direct connections in the European time zone. Today, that number has doubled to 42. Now every major FCM in London can provide its customers with access to our highly reliable trading platform. Overall, 85 firms currently trade Board of Trade products on our electronic system from 167 locations in the U.S., Europe and Asia. In May, we also introduced our internet access point, which is an ideal connection alternative for those firms who are new to trading CBOT products as well as for our Asian firms.
Our strategy is working, as we set a new daily volume record on the electronic platform on May 30th with over 700,000 contracts traded. Volume in May on the electronic platform set a record with over 10,200,000 contracts traded, and overall volume on the system is up 130% from a year ago.
Again, we appreciate the business you bring to the exchange.In closing, I want to say that our members and management team, led by David Vitale, are committed to providing you with the deepest, most transparent and liquid markets on a fair and level playing field. It is our goal to provide you and all users of our markets with the most effective and cost-efficient open auction and electronic trading platforms, and allow you to make the choice where you want to place your business at our exchange.
I am optimistic that the Board of Trade will continue to meet the challenges of the marketplace and provide value for you and your customers. I am optimistic, because, to run a successful business, by definition, you have to be an optimist.
It is like the homeowner who went to his local bank one day to take out a loan. The banker said, "Before we lend you that amount of money, we will first need a statement from you." To which the homeowner replied, "That's easy. You can quote me as saying I am very optimistic."
You can quote me as saying that I am very optimistic about the future of the Chicago Board of Trade, because of our history of strong customer service and product development, because of the market liquidity, flexibility and integrity provided by our membership, and because of the leadership provided by our management team.
Again, thank you for joining us for lunch today. We are working hard to improve the attractiveness of doing business at our exchange while maintaining the integrity of the Chicago Board of Trade, and I appreciate being given the time to discuss some of those changes with you.
