Terrence Duffy of the CME Group Shares His Strategy For Staying Ahead in the Futures Industry
Monday, March 10, 2008SUSIE GHARIB: Stock market volatility, a credit crunch and global demand for commodities are sparking explosive growth in the futures industry. Global trading volume increased nearly 30 percent last year and is on track to exceed that number this year. At the top of the industry is Chicago's CME Group, headed by Terry Duffy. Recently Diane Eastabrook sat down with the exchange chairman, who talked about the importance of staying on top of this highly competitive industry.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the roller coaster world of futures trading, the CME Group keeps racing to higher summits. Last year's merger between the Chicago Mercantile Exchange and the Chicago Board of Trade created the world's largest futures exchange. In a few weeks, all open out cry trading at the Chicago mercantile exchange will move to new pits now being built at the Chicago Board of Trade. But as CME Group Chairman Terry Duffy prepares for his cross-town move, he talks about the CME's need to get even bigger.
TERRENCE DUFFY, CHAIRMAN, CME GROUP: It's not a question of bigger is better. The question is the efficiency to the marketplace and the way to achieve the efficiencies is through the saving of consolidation and passing those savings to your clients. We're not just competing with exchanges here in the United States. We're competing with exchanges throughout the world. We're competing with the over-the-counter markets. And we've got to become efficient and the way to create those efficiencies partially is through consolidation.
EASTABROOK: Duffy's first priority is a potential acquisition of the New York Mercantile Exchange. The CME and Nymex began exclusive merger talks at the end of January and will continue those negotiations until the end of this week. Duffy makes no secret that energy contracts are what the CME is after. The CME currently lists Nymex energy contracts on its Globex electronic trading system. Duffy wouldn't speculate if the CME would try to list its own energy products if a merger with Nymex fails, but he thinks trading physical energy contracts is crucial.
DUFFY: Energy is without question an asset class today, where, maybe 10, 15 years ago, people didn't refer to it as an asset class. It's a big marketplace today and again it diversifies the CME's portfolio, even though it's on our Globex system today, which helps the diversification standpoint. But again it would be a part of CME Group and we think it's a benefit to our shareholders and our users.
EASTABROOK: The CME is also expanding its global reach. It recently bought a stake in the Brazil futures exchange and inked a trading agreement with the Korea exchange. Duffy says the CME is also looking to develop the next big trend in futures trading.
DUFFY: What is going to be the next big thing? Obviously carbon emissions trading and things of that nature is thought of globally as we have to find a solution for it, so exchanges are looking to list different contracts as it relates to carbon permit trading. You look at credit default swaps. I think it's a huge market and there are a lot of exchanges looking to list that product to trade it in a structured way. That's been a challenge for all of us. We all know we want to list the product. The question is, how do we write the contract specs so that it meets the needs of a regulated futures exchange?
EASTABROK: Despite its growth potential, the CME's stock price has been floundering since the beginning of the year. That performance has been impacted by a suggestion by the Justice Department to bar U.S. exchanges from clearing their own trades and from the threat of additional competition by another proposed all electronic exchange. Still, exchange analyst Richard Repetto, from Sandler O'Neill and Partners, thinks the CME will overcome those challenges and prosper.
RICHARD REPETTO, EXCHANGE ANALYST, SANDLER O'NEILL & PARTNERS: The CME has an outstanding business model. It is competitive or comparative with the other futures exchanges, the models globally. Now is it a very strong model? Absolutely.
EASTABROOK: Duffy thinks increased government regulation and implementing new technologies could be two of the big challenges for the CME in the future. But except for a move across town, he doesn't think the CME will look about the same in 20 years than it does today. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
