June 15, 1999

Where's the beef? Trading cattle online

By Michael Lerner, Forbes

Amarillo, Tex.-based FutureCom is bucking to become what it bills as the "World's First Internet Futures Exchange." The company has applied to the Commodity Futures Trading Commission (CFTC) to begin trading options in grain and live cattle. Why cattle? Because FutureCom is an affiliate of The Texas Beef Group, a number of commonly held grain and cattle companies headquartered in Amarillo.

If approved, the exchange will steer the way for commodity trading in the next century. In testimony before a subcommittee of the House Committee on Banking and Financial Services, Brooksley Born, chairman of the CFTC explained: "FutureCom's use of the Internet and its membership structure would create a new model for participation in U.S. futures exchanges. Using the Internet to transmit trade and financial information would facilitate direct access by the public and would result in the elimination of a significant role for intermediaries."

In traditional pit trading, transactions pass through the hands of multiple brokers. With electronic exchanges, buyers and sellers are linked directly, with software mediating transactions, bypassing the middlemen, the futures commission merchants. In FutureCom's futures exchange, traders access the password-protected electronic trading floor via the Internet. Anyone with a PC and Internet access is a potential trader.

FutureCom is structured as a limited partnership and will be operated on a for-profit basis, unlike most exchanges in the U.S., which are owned by the members. The company will approve traders for membership and traders are financially responsible to FutureCom. Before a trade can be made, the requisite margin must be in a trader's account. Account balance and position data are available in real-time.

Bill O'Brien, managing partner of The Texas Beef Group and the developer of FutureCom, says: "The Internet is egalitarian. With a $1,000 computer and a $20 a month Internet hookup, a farmer will be able to manage his own risk on his own products. This will broaden out the base and increase the volume of contracts in agricultural commodities. It will reduce trading fees and lower transaction costs."

O'Brien plays against the stereotype of the low-tech rancher. He has been using the Internet for years, developing an online database that provides real-time information about all the company's cattle--their weight, location and medications, among other things. He wants to use the Internet to bring efficiency to commodities trading and put timely information into the hands of ranchers and farmers.

But getting government approval for FutureCom is proving more difficult than finding tofu at a barbecue. FutureCom's application, first filed in January 1997, is still under review. In his House testimony, Born said: "In October 1996, in my first speech as chair of the CFTC, I addressed the need for the U.S. futures industry to embrace technological innovation." While electronic trading systems are now being used, typically by large institutional traders over virtual private networks, the commission has dragged its feet for two and a half years in approving FutureCom's Internet-based exchange.

O'Brien claims that the big exchanges warned the commission that the Internet was untested. "They wrote letters saying that if you don't check it out properly, you are going to give the whole industry a black eye." According a Katherine Spring, a spokeswoman for the Chicago Board of Trade, the board sent a letter to the commission in late 1997, supporting the use of Internet technology, but withholding endorsement of FutureCom's application "because it lacked information about the audit trail and surveillance." Asked if the board felt a competitive threat from trading over the Internet, Spring said: "If we can attract a new type of customer to our market because of the Internet, we are in favor of that."

"Initially the commission told me they had grave concerns about trading over the Internet," says O'Brien. "Now, the explosion of online equity trading has helped us." He says that commission members will be trekking to Amarillo later this month to rigorously test FutureCom's technology during a simulated trading session. He says the company has demonstrated it before, but will do it again. "They claim this will be their final visit."* Michael Greenberger, director of the division of Trading and Markets of the CFTC says, "We will be working with FutureCom to bring this to finality. We have cautious optimism that the application will be approved soon."

When it is approved, FutureCom will be the first exchange of its kind. According to Greenberger, while no other company has applied for an application, there has been interest. "The experience the CFTC has gained will enable other applications to move more quickly." While cattle and grain will be the first commodities out the shoot, FutureCom plans to use its lead to trade in a family of related products. "We're looking for strategic partners right now," says O'Brien.

(* An earlier version of this story incorrectly attributed this quote to Michael Greenberger.