NYSE, Chicago’s Merc to Explore Trading Links : Exchanges Appoint Joint Task Force to Consider Areas of Mutual Interest
The New York Stock Exchange and the Chicago Mercantile Exchange, two of the nation’s leading financial marketplaces, said Thursday they will explore the possibility of a trading link. It would be an unprecedented interconnection between securities and commodities exchanges.
The relationship to be explored by the Big Board and the Merc, as the NYSE and CME are known, would bring together two exchanges on which trading is already intertwined inextricably through the medium of “program trading,” in which big investors match their stock trades with investments in stock index futures. But all such trading is conducted by investment firms; traders on the floor of each exchange have no direct access to trades on or information from the other.
The most heavily used index future, based on the Standard & Poor’s 500 index, is traded on the Chicago Mercantile Exchange, where it is the most active contract on the exchange. The index is based on the prices of 500 stocks traded on the New York Stock Exchange.
Program trades, in which orders for the purchase or sale of thousands of shares of hundreds of different stocks may be placed within seconds, have contributed to record trading days on the NYSE over the last two years.
Cross-Product Link
In their announcement Thursday, executives of both exchanges said they had appointed a joint task force to “examine a wide range of areas of mutual interest,” chiefly the opening of a trading link. But although trading links already exist between markets dealing in similar products, including a link between the American and Toronto stock exchanges, a cross-product link is so novel that the representatives of both exchanges said its actual nature could scarcely be conjectured.
“We didn’t start with any preconceived notion of what it might be,” NYSE President Robert J. Birnbaum said.
Financial professionals said, however, that a trading link would acknowledge the convergence of markets throughout the investment world. Where the commodities, securities and banking businesses were once strictly separated, today the same investment firms deal in both securities and futures, banks own brokerages, and financial futures and foreign currency trades bridge all the old dividing lines.
The link might also be relevant to the thickening competition faced by both exchanges, especially the NYSE. That exchange has been battling for stock listings with over-the-counter traders and for market share with off-exchange stockbrokers and regional stock exchanges. Not long ago, it created the New York Futures Exchange in an effort to absorb some of the expanding business in stock-derived futures and options. The futures exchange’s role in any NYSE-CME relationship is unknown. “We’re not going to do anything that would hurt the NYFE,” Birnbaum said.
He said one subject for the task force would be shifting the expiration of stock index futures from the present close of trading on one Friday every quarter to the NYSE opening on those days. This change has long been advocated by NYSE floor brokers, who often bear the brunt of the ferocious order flow that accompanies expiration-inspired program trading and would prefer to have a full trading day to manage it.
Asked whether the task force might recommend the creation of some hybrid trading instrument to serve investors on both exchanges, Birnbaum said: “We didn’t form the task force to create new products.” But Leo Melamed, a leading Chicago Mercantile Exchange trader and chairman of that exchange’s executive committee, said: “If we see a need for a new product, we’re going to explore it.”
Wall Street professionals familiar with both the equity and commodity markets said Thursday’s announcement was unexpected and “very significant,” in the words of Thomas Russo, a leading commodities lawyer in New York.
“In the first place, the animosity that has existed between the commodity and the securities markets vis-a-vis their competing products will lessen if there’s a vested interest for both of them to work together,” he said.
One important result of the talks, he said, could be an expansion of so-called cross-margining for traders with positions in index futures and their underlying stocks. Futures exchanges require investors to place down payments on their holdings that are keyed to the riskiness of their positions--generally the extent to which the futures positions are not backed up by offsetting investments in underlying commodities. So far, an index trader’s stock portfolio has not been counted in such computations.
A trading link, Russo argued, would force the exchanges to better acknowledge the efficiency of such interrelated positions “rather than just protecting their own turf.”
A link would also have wide regulatory implications. The exchange spokesmen said officials at the Securities and Exchange Commission, which regulates the stock market, and the Commodity Futures Trading Commission, which oversees futures trading, had been informed of the creation of the task force but had not asked to be included.
