Liffe may lose euro trade to Germany

TWO large US investment houses are considering shifting all euro interest rate derivatives trade - an area Liffe has traditionally dominated - away from the London exchange to its German arch-rival.

Both Salomon Smith Barney and Chase Manhattan said yesterday there were benefits in trading on the Deutsche Terminborse (DTB), which uses electronic trading.

Rob Standing, managing director of interest rate management at Chase Manhattan in London, said the bank could switch all Euromark trading to DTB in 1999, and that it would be easier to conduct all the bank's business with just one exchange. Simon Bowden of Salomon said it was "inefficient" to trade interest rates in an open outcry environment.

Liffe has traditionally been firmly wedded to open outcry, although recently said it hoped to introduce a "state-of-the-art" electronic trading system by autumn next year. It has been engaged in a fierce battle for market share with the DTB, and has lost the bulk of the trade in the prestigious German bond (Bund) future to the German exchange.

Yesterday's news suggests Liffe's position in short-term interest rate (Stir) products, an area it has historically dominated, could be under threat. Liffe's success in the Stir market is largely due to the complexity the products - current electronic trading platforms cannot replicate the trading of these products in the pit. However, Liffe traders said improvements in electronic trading would gradually erode the benefits of open outcry trading for Stir products.

A Liffe spokesperson said he was "surprised" by the two banks' comments.

The comments will be further food for thought for Liffe's board, which met yesterday to discuss proposals for reform of the exchange. The board has already recommended a move to electronic trading, a streamlining of Liffe's management and the adoption of a "for profit" objective.

The outcome of the board's latest deliberations will be communicated to its 215 members early next week. Members will vote on these proposals at an extraordinary meeting on 21 May.