Traders move to halt pit closures threaten Liffe's blood

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The Independent Online
A GROUP of the big futures trading houses, including Deutsche Bank, JP Morgan and Chase, are pressuring the Bank of England to intervene to halt plans by Liffe, the London futures exchange, to shut down its trading pits and go completely electronic.

They say that if Liffe proceeds with its plans to move the short sterling and euro contracts on to screens later this month, the inability of the electronic system to cope with the sophisticated trading strategies employed in these markets will mean that business will decamp wholesale to Eurex, the Frankfurt electronic system.

The progress of the move to screen-based trading is understood to have been one of the points for discussion at a regular meeting between Brian Williamson, the Liffe chairman, and Eddie George, the Bank of England Governor. Mr George, say Liffe insiders, is concerned that if Liffe does not get this right, then the exchange will simply collapse, leaving a big hole in a market where the City needs to have a strong presence if it is to survive.

With the loss of the benchmark bund contract and its successor, the euro bund future, the short end or Euribor contract is now the battleground on which Liffe's future as a major league derivatives market is being decided.

Traders admit that the Eurex system is at least as problematic as Connect for short term trading but it at least has the merit of being free.

The closure of the dozens of trading pits and the wholesale move on to electronic based trade is a key element of the strategy of Brian Williamson, the chairman, to rebuild Liffe's fortunes. Liffe lost pounds 68m in 1998 and is heading for another significant loss this year.

Liffe has already closed the open outcry trading pits for both individual equity options, and the Euro and sterling government bond contracts as part of a programme to slash costs and return to profit by 2001.

However, the users complain that the short contracts are of a different order of complexity and that the current generation of electronic trading platforms cannot cope. One trader who has used the system points out that in the short sterling or short euro pit, traders are dealing with between 10 and 16 different months, each with their own spreads (the margin between buying and selling prices): "It is just not there. They need another generation," one said.

Liffe said it was aware of the concerns and was planning to keep the pits open, in parallel with electronic trade, as long as there was demand. Simon Chapman who heads the Liffe Connect project said yesterday: "We believe the project is everything which will support the complexity of our products."

If the closure of the pits is halted, Liffe will have to find an alternative source of savings. One plan being discussed is to close the current offices in Cannon Street and move the pits on to the old Stock Exchange floor, next to the Bank of England, which Liffe owns.

However, some exchange members say that Liffe should give more urgent priority to cutting its property portfolio rather than sacrificing its lifeblood, which is the trading pits.