Liffe faces loss of trade

Germany's efficient stock exchange may scoop up London contracts

THE London International Financial Futures and Options Exchange, which is fighting for its future amid a surge in electronic trading, could, after June, lose what is left of its business in Europe's benchmark German bund futures contracts.

Liffe's share of trading in 10-year German bund futures contracts has plummeted from 75 per cent to 19 per cent in less than a year as investors and traders have flocked to the rival contract on Frankfurt's Deutsche Terminboerse (DTB), preferring its electronic trading system to Liffe's open outcry trading.

More than 150,000 bund futures contracts expire on Liffe in June, and so far only 3,161 contracts have been opened for September. That is low enough to suggest such trading could dry up entirely on the UK exchange. By contrast, the DTB already has more than 22,000 September contracts open, representing 3.3 per cent of its 664,000 June contracts. "The traders on Liffe are ready to throw off their hats and drive a cab," said Stephen Ronnie, a futures and options trader at Lehman Brothers Inter- national in Frankfurt.

Although the bulk of Liffe's June bund contracts will be rolled over during the next few weeks, Liffe could face a lack of liquidity if too few are rolled over into September - which could hasten investors' transfer to the DTB exchange.

The speed with which the DTB's electronic exchange, which many traders claim is quicker and cheaper than floor trading, won the bund contract from Liffe, has shocked some traders. "The move has gone already," said David Kyte, head of Kyte Futures and a former board member of Liffe..

Although it's only one contract, the loss of the 10-year bund future would be a blow to Liffe as it struggles to retain members and develop electronic trading alongside its traditional "open outcry" system. Moreover, because German bonds are Europe's benchmark, the bund futures contract will spawn the euro-denominated bond contract that will come to dominate trading on the continent once the common currency is adopted in January.

Liffe remains the undisputed leader in trading interest-rate futures. Trading in short-term interest-rate futures rose 58 per cent in the first four months of the year, helping boost total trading by 13 per cent to almost 76 million contracts. Liffe is also introducing new products to get a fighting chance of being the market leader in contracts on the euro. "I think it's too early to be throwing in your hat just yet," said Mr Ronnie. "Liffe has come up with some pretty progressive ideas for the euro."

The key threat to Liffe is that the DTB could repeat its success in winning the bund contract business in other contracts. Some traders said they were considering moving their interest-rate futures business to the DTB if it proved it could provide enough trading to make good prices.

"We would consider moving our interest-rate contracts to the DTB if volume picks up there," said Simon Bowden, managing director of fixed-income customer derivatives at Salomon Smith Barney. "We are already trading just about all of our bund futures on the DTB."

Liffe's electronic trading system will not be in operationbefore the end of next year. But the exchange is also proposing to allow non- members of Liffe to hold shares and to become a for-profit company, two things that could increase competitiveness.Members will vote on the proposals on 21 May.