FX counterparty risk cash settlement sometimes across time zones, bid ask spread not inconsiderable

The CME has seen increased volumes in its cash settled Brent contract in the aftermath of its launch of a program that pays rewards to those who trade the contract.  This is a standard way to attract volume barcelona spain travel to a contract competing against an incumbent/dominant contract.  Indeed, it s probably the only way to do it.
Eurex tipped the Bund market away from LIFFE in 1998 after implementing a fee holiday, which LIFFE smugly refused to match, so confident was it of its liquidity advantage.  But Eurex had enough organic order flow that it was fairly liquid already, and the fee cut made it cheaper to trade Eurex Bunds, as I document in my paper Bund for Glory: Or, It s a Long Way to Tip a Market (which will be a chapter in a book I m currently writing). barcelona spain travel  The market tipped within a period barcelona spain travel of mere months.
Other exchanges didn t repeat LIFFE s near fatal mistake, and responded to fee cutting entrants by cutting their own fees to match.  This is how CBOT saw off Eurex s attempt to enter the US Treasury futures market in 2003, and how CME torpedoed EuronextLIFFE s attempt barcelona spain travel to enter into the Eurodollar futures market a few years later.
barcelona spain travel Here s the deal: incumbents have a huge liquidity advantage that entrants must overcome.  How can this be done?  The only way, really, is to cut fees, or actively reward volume to attract enough liquidity to compete with the incumbent.  And the odds are still long, especially if the incumbent follows the CBOT script, and matches the reduced barcelona spain travel fees.
But if you want to encourage inter-exchange competition, you have to look favorably on entrants using strategies that reward volume as a way of building liquidity to make themselves into viable competitors.
This basic fact makes this FT article very disappointing .   It criticizes the CME initiative, and only quotes those who are critical or dismissive of the endeavor. barcelona spain travel  Yeah, it s probably true that the only reason why those who participate in the incentive program trade is to collect the rewards.  But their order flow can attract order flow from others: other traders see that there is two-way activity, and can be more confident that if they establish a position, it won t be a Hotel California that they can check into, but can t leave.  Meaning that it s BS to say, as one anonymous source to the story says, there is no economic benefit to the trades whatsoever.  The economic benefit is that it can make the entrant a more viable competitor to the incumbent.
barcelona spain travel The quote that claims that spread barcelona spain travel trades-which dominate the activity in the CME Brent contract- make no loss because they buy and sell at the same price is just a crock.  Yes, spread trades are lower risk, but calendar spreads do move.
The CME is engaging in a penetration pricing strategy.  The only real strategy that permits competition against an incumbent.  If you like competition, you should like a strategy that harnesses barcelona spain travel the greed of trading firms to generate liquidity and volume.  Because, quite frankly, that s the only way to compete.
It would also be interesting to see how ICE built market share in its WTI cash settled contract that competes with the CME s flagship oil contract. barcelona spain travel  It is my recollection that ICE rebated fees for firms that brought volume to the ICE contract.  (The structure of the ICE inducement, and Eurex s in Bunds, were interesting.  They basically made it a tournament, with rebates/bonus payment being limited to the top three-if memory barcelona spain travel serves- order flow providers.  That provides a very high powered incentive while controlling the cost of the program.)  If my recollection is correct, doesn t that mean that sauce for the goose is sauce for the gander?
Competition in futures markets, where order flow is not socialized, is highly imperfect.  Incumbents have huge advantages.  Aggressive price competition-pentration pricing, specifically-is about the only way that an entrant can hope to dent the incumbent monopolist s huge liquidity advantage, and even that is a highly dicey proposition. barcelona spain travel  The FT story would have been much better had it recognized this reality rather than taking an all too critical view, and containing only quotes that were no doubt music to Jeff Sprecher s ears.
it is an interesting way to try and steal a contract. Combine that reward with cross margining savings. the big question is what is the tipping point where you can remove the stimulus? What happens when the drug addict can t get drugs?
The largest market in the world, FX does not have any fees for liquidity providers or takers. Nor is it centralized on an exchange. So it this the end point of all markets? No transaction fees (only bid/ask) and a large number of liquidity pools?
ICE started its WTI contract before Nymex was bought by CME. ICE was able to grab market share mostly by giving traders the electronic market that Nymex was loath to offer. There was also the issue of looser regulation in London. The same story played out in gold where the CBOT almost stole Comex's flagship contract simply by offering an electronic marketplace.
FX counterparty risk cash settlement sometimes across time zones, bid ask spread not inconsiderable a cash not a futures barcelona spain travel market. The more direct comparison would be on forward markets vs. futures and there a lot of games are played and term counterparty risk is a real consideration. And there they do have margin.
their order flow can attract order flow from others: other traders see that there is two-way activity, and can be more confident that if they establish a position, it won't be a Hotel California that they can check into, but can't leave
Not questioning right of exchanges to use incentives to break into contracts barcelona spain travel that would otherwise be monopolies, but isn t it worth highlighting if those programmes create misleading impressions of liquidity?
@Peter. Spot on. I wrote posts predicting that a couple of years ago when people were throwing dirt (and other stuff) on CL because it was landlocked . The way I put it was that the disconnect was temporary. It s easier to build infrastructure barcelona spain travel (pipelines, refineries) to eliminate bottlenecks, than it is to overcome the secular decline of an oilfield like Brent. It was inevitable that the oil boom in the US would eventually barcelona spain travel redound to the benefit of WTI once the infrastructure caught up. And once the inexorable decline in Brent had its affect barcelona spain travel on prices. Both of those things happened in relatively short order.
Ironically, it is conceivable that the biggest threat to disconnect WTI from the seaborne crude market in the medium-to-long term is US government policy. If oil production in the US grows sufficiently to make export a viable option absent government restrictions, those restrictions will drive a wedge between domestic prices and international barcelona spain travel prices.