The Wall Street Journal Interactive Edition -- February 3, 1997

Cattle Concern Seeks to Open

Electronic Commodities Market

By TOM DOGGETT

Dow Jones News Services

WASHINGTON -- The Commodity Futures Trading Commission is considering whether to allow a Texas company to operate the first U.S. electronic commodities exchange for trading future and option contracts.

The CFTC received an application last month from privately owned Texas Beef to operate such a market, named FutureCom. Texas Beef, Amarillo, processes 200,000 head of cattle a year through two feed yards it owns in the Texas Panhandle. The company also owns a commodities brokerage, a financing unit and an on-line data service providing up-to-the-minute price quotes for cattle futures.

The company also wants approval for the electronic exchange's first set of listed contracts -- live-cattle futures and options.

The agency published the FutureCom proposals in Friday's edition of the Federal Register for public comment.

FutureCom would not only be competing with the Chicago Mercantile Exchange's live-cattle contracts but would also be taking on all of the traditional, "open outcry" U.S. commodity exchanges, where traders fill customer orders by shouting them to one another.

Electronic trading would reduce traditional commodity-exchange trading costs by 75%, according to Bill O'Brien, managing partner of Texas Beef, who developed FutureCom. Most of that savings would come from eliminating "many layers of order handling that exist under current commodity trading systems," Mr. O'Brien said. "So we're going to be able to deliver a very, very competitive commission structure."

FutureCom would be based in Amarillo, but there wouldn't be a trading floor. Instead, Mr. O'Brien said, a cluster of computers would receive and display orders from traders around the country, and possibly the world. Traders would send in orders over the Internet and would have passwords to gain access to secured trading on FutureCom.

Trading would take place from 8 a.m. to noon Central Time, beginning about an hour earlier than some contract pits at the Chicago Mercantile Exchange and the Chicago Board of Trade. Mr. O'Brien said this would allow FutureCom traders to respond more quickly to production reports from the Department of Agriculture and to other government economic data. The exchange would close about an hour earlier than some pits in the Chicago markets.

Still, Mr. O'Brien said, trading hours would expand with demand. "There is nothing on the technological side that would prevent 24-hour trading, because you aren't depending on people to handle orders," he said.

While FutureCom would start out listing only cattle contracts, Mr. O'Brien said there are other agricultural contracts planned for the exchange. They will be cash-settled instead of settled by physical delivery of the underlying commodity, according to Mr. O'Brien. He said cash-settled contracts appeal to traders because they are easier to understand and save money.

"I know a lot of cattle people and farmers who won't trade current exchange-listed agricultural contracts because they've all heard some horror story that someone got a notice about a delivery problem or delivery expense," he said.

At the Chicago Merc, reaction to the proposal was skeptical. Tony McCormick, an industry governor at the Chicago Merc, described FutureCom as "a spoof." He added, "I don't see the liquidity, like in the live [pits], when news comes out."