Regulated market sees steep rise in activity

Major derivatives exchanges have seen a sharp rise in regulated trading activity in the past ten months, driven by the wider use of derivatives as hedge products and trading opportunities created by increased volatility.

Europe's two biggest derivatives exchanges, the London International Financial Futures and Options Exchange (Liffe) and Germany’s Eurex both saw a big rise in the number of contracts traded for this year. Liffe recorded a 61% increase in contract volumes while Eurex had a 46% increase for the year-to-date. Amanda Sudworth, Liffe's head of interest rate products, pointed to global interest rate volatility as being a key factor in trading growth on Liffe, with more investors seeking to hedge out interest rate risk.

At Euronext, the pan-European financial exchange formed through the merger of the Amsterdam, Paris and Brussels exchanges, derivative trading volume rose by 18.4% for the ten months to October from the same period last year. Robert Bakker, spokesperson for the Amsterdam office, said, "Its not the first time that derivatives volumes have increased when there is big volatility". He pointed to 1998, when the near-collapse of LTCM caused financial markets turbulence, as being a similar year for increased derivatives trading.

In the US, volumes at the Chicago Mercantile Exchange (CME) for the year-to-date rose 75% from the previous year. Volumes at the exchange have been strong in the last six to seven months as retail investors have become more familiar with the exchanges' Globex 2 electronic system, according to Scott Brusso, director of currency product sales at the exchange. The Globex 2 electronic system allows for trading virtually around the clock, which Brusso claimed had attracted a large number of European retail traders. Euro FX futures set a new electronic volume record of 16,605 contracts on October 29, against a previous record of 10,988 set on August 28.

"The Merc has a good brand name, no credit problems. Once you can provide liquidity and good transparency, people will use the system more," said Yra Harris, an independent trader at the exchange.

The Chicago Board of Trade (CBOT) saw only 6.4% increase year-to-date for its combined derivatives products, due primarily to weak agricultural trading, with the exception of wheat futures, volumes of which have risen recently due to speculation that there may be lower global supplies in the wheat market.

By contrast, the International Securities Exchange (ISE) grew to become the third largest options exchange in the US by number of contracts traded. ISE is the first fully electronic options exchange in the United States, and the world's first options market-place combining electronic trading and auction market principles. The exchange was named the derivatives exchange of the year by RiskNews' sister publication Risk in its 2001 awards.