BARRON'S

A Texan Thinks Big

Plans first U.S. electronic futures exchange

Clifton Linton

Table: Key Commodity Indexes

A private Texas-based concern is pitting itself against the mighty Chicago Mercantile Exchange with a plan for the U.S.'s first electronic futures exchange. Texas Beef Trading, an Amarillo ranching and feedlot company, has applied to the Commodity Futures Trading Commission for an exchange called Futurecom to trade live cattle futures, now exclusively traded on the CME.

Futurecom is the brainchild of William O'Brien and the firm he manages, Texas Beef. If it manages to get up and running, the prices it posts should make traders on the CME floor more competitive and narrow the bid-asked spread. Additionally, says O'Brien, investors should be able to buy or sell contracts at more favorable prices and lower commissions. He predicts transaction costs on Futurecom will be 25% of the current average, which can run between $10 and $40 per contract at the CME.

Orders can be sent to Futurecom via the Internet, says O'Brien. Additionally, the first order in at a particular price will be the first order executed - FIFO, in other words. The computer will insure that small traders will not find their orders shunted aside by the big boys in the pits and the commercial cattle companies. O'Brien also says he will settle in cash, meaning market participants would not have to go through the nerve-wracking delivery process that scares a lot of them away.

But like most of the advantages O'Brien claims for his brainchild, there's a flip side to all of this, and the CME is happy to point it out.

Cash settlement, for example. The Merc has been looking at this for years, says Jeffrey Silverman, a CME director, and still feels open outcry is more efficient. The stumbling block is price reporting. ``In an industry as concentrated as cattle, it would seem that mandatory price reporting would be needed to have a viable index,'' he says.

Of course, nobody knows anything about the financial integrity of the new exchange, either. Asks Alex Lamb, general manager of Fimat Futures (USA): ``Is the customer safe in the knowledge that the company that owns the exchange is also in the business?'' O'Brien promises an effective firewall between Texas Beef and Futurecom. Trades, he says, will be matched and cleared as they are executed.

In the futures business, being first still counts for a lot, says Richard Sandor, second vice chairman at the Chicago Board of Trade, and it will always be hard for a newcomer to compete ``where there are existing liquid markets.'' Sandor knows something about creating new products - he invented Treasury-bond futures trading.

While the Chicago traders may not want to say so, some are plenty worried about the threat of electronic exchanges. In Europe, the London International Financial Futures and Options Exchange and Germany's electronic Deutsche Terminborse (DTB) compete head-to-head on several interest-rate products.

DTB got a big boost from the German government, which requires German banks and financial institutions to use it, but even so, Silverman maintains, ``the electronic exchange has so far not managed to get the upper hand.''

The handwriting is on the wall, though, he concedes: ``In the last five years, I think all the new futures exchanges have been electronic in nature.''

And one thing is sure: It would be a lot quieter.

CLIFTON LINTON covers the exchanges in Chicago for Dow Jones News Service.

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