Good Derivatives: A Story of Financial and Environmental Innovation

Chapter 14

From the Pit to the Box

The Ascent of Electronic, Publicly Traded Exchanges

We are no longer the knights who say ni! We are now the knights who say ekki-ekki-ekki-pitang-zoom-boing!

—Monty Python

The decade of the 1990s ushered in the era of the next major revolution in U.S. futures markets—electronic trading. This in turn led to demutualization and initial public offerings (IPOs) of all major U.S. futures exchanges. There was no plan etched in stone by any single exchange to make all of this happen. Instead, a series of loosely related, and often arbitrary, events in Europe and the United States drove the trend. I was a witness to those events and played some small part in the transformation.

A Civilization Gone with the Wind

Exciting developments were taking place in the exchange world, and floor trading was on the way to becoming “a civilization gone with the wind.”¹ I wanted to be part of the new world of electronic trading.

In Frankfurt, Deutsche Terminbörse (DTB) began an aggressive campaign to dislodge Liffe in London as the leader in Bund futures. To start off, DTB had a market share of about 35 percent, thanks to support from German banks. The first step of its campaign was to provide electronic access to their market for nonresident investors from London.² This move signaled the beginning of the end for floor trading in Europe. Electronic exchanges were simply more cost-effective than open outcry. I erroneously thought that U.S. exchanges, in particular the ...