Commodities & Futures: Shivers in the dawn of a new era

AFTER frenzied growth in the Eighties, the futures and options industry is now facing some harsh realities. Market saturation, recession, and competition from the off-exchange derivatives markets are posing major challenges.

The giant Chicago futures exchanges continue losing market share to Europe. But the Europeans worry about their future in a united Europe. The Japanese are treading water amid domestic financial malaise.

The exchanges are looking for new markets. The most controversial innovation aimed at increasing business is Globex, the after-hours futures and options trading system launched this summer by the Chicago Mercantile Exchange and the Chicago Board of Trade, and developed by Reuters.

Globex was hailed at its conception in 1987 as 'the dawn of a new era' of global, 24-hour electronic trading, linking all the world's markets and time zones. It frightened the daylights out of exchanges that saw the huge Chicago markets dominating the industry forever, and open outcry trading replaced by cold computer screens.

At Burgenstock, a secluded Swiss mountain-top retreat where futures industry regulators and leaders rub shoulders, the anxiety over Globex was palpable. Reuters' most powerful executives wafted in from nowhere. Public relations men worked the crowd. Globex demonstrations were running practically non-stop. The European exchange executives eyed each other nervously.

Exchanges regard Globex with a mixture of enthusiasm, scepticism and fear: enthusiasm at the prospect of their contracts being traded around the clock; scepticism about the actual demand for such a costly system; and fear that if they do not join they will be left in the dust.

In fact, at the conference the Deutsche Terminborse (DTB), Frankfurt's electronic futures and options exchange, proclaimed its interest. Its revelation prompted Liffe, London's exchange, to disclose that it is closer to joining Globex than it has ever been. London's International Petroleum Exchange is also considering it.

Gary Ginter, Globex managing director, aims to have five leading exchanges signed up by 1995, and 20 in 10 years. Matif, the Paris exchange, and the Sydney Futures Exchange have already agreed.

But success is by no means assured, and progress will be slow. Because Reuters began work on the project in 1987, Globex technology was already out of date by the summer launch and may need to be revamped at some point.

Volumes are still low, averaging 3,000 a day in September for 14 Chicago-based products, the only ones listed yet. Globex's ability to handle huge volumes and hectic conditions is untested.

Short-term costs may deter potential users. It costs dollars 880 (about pounds 440) a month plus installation to have a Globex screen, and each trade costs dollars 1 per side for members, and dollars 2 for customers. Globex has yet to capture the Asian exchanges, so its vision is still incomplete.

The system is no longer seen as a development that can revolutionise the futures and options industry overnight. But its value may be as a provider of global exposure to star products on small exchanges, and 24-hour access to markets during turbulent times. Its reception indicates that 'realism' has replaced 'globalisation' as the buzzword of the industry.