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PFPC BrokerTec Ups the Ante in Futures Execution

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JERSEY CITY, N.J. (–Competition might heat up among futures exchanges as the new kid on the block, BrokerTec, works to improve service while keeping fees down.

Since it launched its first product in 2000, the electronic exchange has suffered from low trade volumes compared to the long-established Chicago Board of Trade. But BrokerTec is making changes that increase speed and flexibility. For example, last month it reduced the minimum tick size of the five-year Treasury note contract from one half of 1/32nd of a point to one fourth of 1/32nd of a point.

“As we deliver better price and better execution than the competitor, people become more willing to come to us,” BrokerTec President Hank Mlynarski said. “The growth of the futures market in the U.S. has been stunted because exchange providers don’t have rules and cost structure and policies conducive to the interests of clients.”

Stay Tuned

Mr. Mlynarski has a lot to say on the practices of futures exchange operators. Differential pricing is one major complaint. “I don’t know any other successful industry that charges its best and most active customers the most, except the U.S. futures market,” he said.

At the CBOT, non-member customers, for example hedge funds, have to pay fees that are many times what exchange members are charged for the same trade, he pointed out. “The customer is charged the most,” said Mr. Mlynarski.

“That is an unstable pricing model. Competition in the marketplace will dramatically reduce the cost of execution to the end user. That is what we are about,” he added.

Still, most trades go through the CBOT. BrokerTec markets are becoming more liquid, however. The February monthly volume, 143,275 contracts, represented a 44.5% increase over the 99,142 contracts traded in the same period last year. Year-to-date the number is 348,671, compared to 215,216 contracts traded during the first two months of 2002, making for an increase of 62%.

“We are starting to be competitive in some contracts, in particular the five-year note contract–for at least 75% of our main trading day, we have levels identical to or better than the Chicago Board of Trade and an equally deep market,” said Mr. Mlynarski. “Yet we charge a fraction of what they charge.” Recent growth continues a trend from 2001 and 2002.

But BrokerTec has other problems, as pointed out by competitors, such as the chairman of CBOT. The Justice Department is looking at the BrokerTec cash platform for potential conflicts of interest.

Accusations are not stopping the electronic exchange. “Stay tuned,” said Mr. Mlynarski. “There are changes coming that will be important. We’re looking to further build liquidity in our contracts and working on new product introductions.” He declined to be more specific about the plans.

What he expanded on in detail is a grand vision of futures. “There is vast potential here,” he predicts. “But you have to provide traders access and break the barriers.”

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