Cover Story: The bright side of Liffe
It was Liffe, but not as the traders in their flash jackets once knew it. The London International Financial Futures Exchange was being dealt off the floor by its rivals, and all it could look forward to was a slow, humiliating death. But six months after the arrival of the sober- suited Brian Williamson, and with help from the unfashionable euro, Liffe is starting to look up again
Wednesday 28 April 1999
For years, Liffe had deluded itself into thinking that its "open outcry" method of face-to-face trading, was the only way to run a futures market. A mixture of arrogance and powerful vested interest made it impervious to change. When Frankfurt launched its electronic trading screens, Liffe was there for the taking, and as its main claim to be a genuinely international exchange, the bund contract, seeped away, Liffe seemed destined for the second division - or worse. Liffe, in the view of many, was caught in a time warp and destined for irrelevance.
The picture today could hardly be more different. Just six months after Mr Williamson took back the helm, Liffe is back on the map.
What should have been the final nail in its coffin, the advent of the euro, has instead brought about a renaissance in its affairs. From a standing start Liffe has captured nearly 90 per cent of the trade in the benchmark euro interest future, the Euribor contract with more than 2 trillion euro's worth of business traded through the exchange. The London futures market is again making the running against competition not just from the Germans, but from the fragmented American futures exchanges, who for once are running to catch up.
But Liffe, Mr Williamson insists, is not out of the woods yet. "I thought there was one year in which to secure the future of the exchange," he says. "I don't think we will really know whether it has a future and where it lies until that year is complete."
Eurex still dominates the long-end of the Euro derivatives market, while Liffe has yet successfully to complete the transition into the computer age. Yet, there is an optimism in the London market today which is such a far cry from the gloom and despondency which ruled last summer that the two beasts are barely recognisable as one and the same.
Grabbing the entire Euro money market futures business from under the noses of the Germans and Liffe's French rival Matif within weeks of the euro's launch, was, Mr Williamson acknowledges, a significant victory. "That was the first time I realised we had a real chance not just of saving the exchange but of actually re-establishing our past success."
Mr Williamson, a dapper, 53-year-old whose conventional City look and accent belie an unorthodox approach, was one of the driving forces in setting up the exchange in the teeth of entrenched City opposition nearly two decades ago. Within weeks of his return to Liffe's Cannon Street headquarters, the sense of change was palpable. "He has done what good leaders do," says Mathew Fosh, of brokers SGF Futures & Options. "He has given Liffe confidence in the future."
That future has come to hold a crucial symbolic importance for the City of London, as it agonises about its place in a European and global market place where speed and efficiency count for rather more than the old school tie. For years, the success of Liffe with its colourfully plumaged traders, muttering equally colourful expletives as they barked out prices in German or Italian government bond futures, appeared to silence the doubts.
When all that crumbled last summer, after the Swiss-German Eurex took control of the bund futures market, it seemed the pessimists, who said the single currency heralded the end of London's role as Europe's financial centre, were right. To Mr Williamson it was clear Liffe was heading for serious problems: "In this market, you can't be arrogant, you can't be alone, you can't be aloof. For a while Liffe was all three."
Towards the end of the chairmanship of his predecessor Jack Wrigglesworth, he says it was obvious "radical change was necessary". In particular, Mr Williamson believed, Liffe needed a "commercial edge", an odd thing for a market operating at the frontiers of financial trade not to have, but all too plainly lacking at Liffe.
Immediately after taking charge of Liffe in August, Mr Williamson embarked on a lightning tour of Liffe's big institutional customers in an effort to find out what it would take to win their confidence back. Listening to what the customers want is hardly business rocket science, but it was something that had fallen into sad neglect at Liffe. One of his first moves was to appoint a chief executive, the South African-born Hugh Freedberg to take charge of day to day management, freeing time to concentrate on big picture issues. He also drafted in a host of City figures including Sir Brian Pitman, chairman of Lloyds-TSB, the clearing bank, Christopher Sharples from GNI, the broking house, and David Hardy, head of the London Clearing House. Within weeks, this so-called Fast Progress Group had come up with an action plan for reversing Liffe's decline. Eurex had stolen a march by being first out of the traps with a screen-based trading system which was cheaper than Liffe and allowed dealing from almost anywhere around the globe. Eurex also benefited from the backing of the big German banks and the political sponsorship of the German government.
Liffe, which had been able to get away with charging what it liked by virtue of its former stranglehold over the European derivatives market, first had to get a grip on costs. Secondly, it had to grasp the nettle of technology, which it had repeatedly ducked. That meant accelerating the development of its screen-based trading system Liffe Connect and, hardest of all, waving goodbye to the trading pits, which to the outside world are the visible face of Liffe and the City. To survive, Liffe would have to become leaner, fitter and cheaper.
Since November, when Mr Williamson announced that 60 per cent of Liffe's 1000 staff would have to go, more than a third of Liffe's 20 trading pits have closed. Last week Liffe's gilts futures pit was shut. In two weeks the FTSE 100, 250 index futures pits close, leaving the exchange with five times as much real estate on its hands than it will need. By the time the process is over Liffe will have cut its costs by more than a half compared with last year.
Liffe's board has been streamlined and the Exchange's shareholding structure changed to allow outside investors to participate, a first step towards an eventual goal of a stock market flotation. Liffe will no longer be a club of exchange members, but a commercial company whose ability to fund development will depend on its success in producing results.
As Liffe grows in confidence once more, attention has begun to focus again on the failings of its competitors. Eurex, which a year ago steamrollered all before it, has had its setbacks these past few months. In January a traders' revolt at the Chicago Board of Trade, led to the Windy's City's premier derivatives exchange tearing up an agreement to form an alliance with Eurex and opting to go alone.
Eurex's customers too have started to defect. Critics say Eurex's computer trading system, now several years old, is creaking under the strain. There are mutterings about whether Eurex's bureaucratic settlement and clearing system is up to the task of processing the volumes required.
Many in the industry think Chicago, once the world derivatives capital, is also riding for a fall. David Brennan, the new chairman of the CBOT may be about to repeat the mistakes Liffe made several years ago when, because of pressure from floor traders, it insisted on clinging to its open outcry traditions while others plunged headlong into the technology game. The traditional duopoly of the Chicago Board of Trade and the Chicago Mercantile Exchange is threatened by a new private sector initiative from Cantor Fitzgerald, the brokerage which wants to launch its own exchange.
For those displaced by the changes, life has been tough. The hardest hurdle to overcome has been the psychological one of ditching what to many has been the heart and soul of Liffe since it was launched in the heady days of the early 1980s. Looking back, it is hard to remember the ridicule which first accompanied the appearance on the streets of the City of the Liffe traders, with their trademark blazers, hand signals and sharp-witted, barrow boy terminology - so much have they become part of the City landscape.
The multicoloured jackets, were, like many of the features which were to become an integral part of the London futures market, copied wholesale from Chicago, which was the only model of a successful futures market around when Liffe was founded. Traders were often greeted with cries of "two ice-lollies" or "ice-cream man".
Yet they were to become a City institution. To many, the floor is the market, the gyrating arms, the shouting, the aggression, the epitome of real capitalism, red in tooth and claw. Giving up that raw energy for the more cerebral pleasures of watching numbers dance on a screen is not going to be easy.
Already, the pubs and champagne bars along Cannon Street are noticeably less crowded. The swarms of blue, green and red jacketed traders that once flooded the neighbouring streets every lunch time has slowed to a trickle. The hardest hit have been the locals - the freelance traders who in their heyday provided most of the liquidity - the lifeblood of any market.
Some have already retrained for a more office-bound existence as screen- based traders. Others have simply thrown in the towel. One has recycled his market gains to open a restaurant in Spain.
Romantics question whether the new computer-driven market will ever produce the rags-to-riches heroes that the floor-based trading of yesteryear spawned - figures like Terry Crawley, the pounds 100-a-week carpet layer from Bermondsey who made the Sunday Times Rich List after netting pounds 8m a year as a Liffe trader. The successful in the new computer-based market will be of a different breed, more intellectual, better-educated, relying more on analysis of long-term market trends, and less on animal instinct.
Miles Blackstein, a Liffe local who like many in the market has had to re-invent himself over the past six months, says: "It was a very unreal life. There were periods when you could just walk in and make pounds 5,000 for a few hours work. You never forget the first time you walk on the floor and there are 2,000 people screaming. There were moments like just before the New York opening when everyone was stamping their feet. It was very exciting."
Mr Williamson, who started in the City when the stock exchange was a seething pit of jobbers sporting top hats, believes the passage of the stereotypical Liffe trader is inevitable. "London has always been primarily an institutional market," he says.
These days markets are expected to operate through "open systems", not closed proprietary methods, hardware and spaces - the idea being that trading houses will buy their own computer hardware and have prices piped in from a variety of sources. Mr Williamson reckons this is the real challenge ahead for the derivatives exchanges. Rather than pushing its own trading system exclusively, it has signed up with 15 software providers so that its Liffe Connect system can be offered to anyone with a desktop PC.
Another issue is that publicly traded contracts such as stock exchange or currency futures are now a small proportion of total derivatives business. The big growth area is so-called over-the-counter derivatives, tailor- made instruments like swaps, which allow institutions to hedge interest rate risk. The bulk of these are offered by banks to other banks and financial institutions, rather than through exchanges. The drawback is that these contracts are only as good as the bank you bought them from, whereas exchange- traded contracts are guaranteed by the exchange and can be freely bought and sold without risk of default.
Mr Williamson's ambition is to offer exchange versions of these products.
Finally, there is also the issue - banal to the outsider - of clearing. The corollary of being able to trade at the flick of the switch, is that someone is at hand to make sure that at the end of the day everything balances up. What banks want more than anything these days is centralised global clearing, so that trades done on one exchange can be matched with trades on another exchange. Mr Williamson believes if anyone can provide that service it is London, the only financial centre in the world, New York included, which is comfortable dealing with the demands of a truly international client base. Mathew Fosh of SFG says if he can resolve this problem, he will have found the financial markets equivalent of the Holy Grail.
The harsh reality Mr Williamson faces is that in a global market place, exchanges are no longer about having a physical presence, buildings, traders, history, or a culture, but about providing services to a footloose clientele more efficiently than anyone else. "Change," says Mr Fosh, "is inevitable. What the exchanges will end up being is IT houses with product capability." Mr Williamson sees that as an opportunity, not a threat. "I am optimistic. The reason I am optimistic is that all the people who do the business are in London. London is such a vibrant place. It does a majority of forward rate dealing in the yen, dollar, euro.
"London has a great opportunity to have settlement in equity, bond, derivatives markets, all together. All the people who do that business are here. London just has to get its act together."
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