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Jun 26, 2012 ||
John Labuszewski ||
Electronic trading systems have changed the face of the exchange-traded derivatives industry on a scale that was virtually unimaginable 20 years ago. The advantages of electronic trading include ease of access from virtually anywhere worldwide almost 24 hours a day, speed, efficiency and lower costs.
It was with this in mind that the concept for an electronic trading platform was conceived by CME Group leadership in 1987 as a “low-impact” means of providing 24-hour market coverage. One example where round-the-clock coverage had an immediate impact was in interbank currency trading. Its epicenter is in London where much trade is concluded while traders in Chicago are asleep. If CME Group could see increased order flows through electronic trading, market participants could experience increased liquidity during these hours.
Leo Melamed, Jack Sandner and Bill Brodsky prepare for the June 25, 1992, launch of CME Globex. Trading volume on the first overnight session was 1,939 trades.
It took until June 25, 1992 for the technologies to actually become operational in the context of currency products, and what we now know as CME Globex went live. Initial volumes were modest but interest was keen, and the system grew steadily in popularity. While the system was initially sold as a convenience for currency traders, CME Group leadership had a larger vision and believed that electronic trading could be made to serve as another source of distribution for all of the exchange’s varied product lines.
Most technological advancements need a breakthrough moment where users begin to adapt the innovation to their lives. For Globex, that moment came in 1997 with the launch of E-mini S&P 500 futures –a contract one-fifth the size of the standard S&P 500 futures contract and offered only on the CME Globex system.
Perhaps one of the key milestones in the history of the CME Globex system occurred in late 2000 when CME Group leadership implemented an “open access” policy. This meant that customers could trade in the open outcry pits as well as directly on CME Globex provided that their clearing firm provided a financial guarantee for their trading activities.
This open access policy accomplished one thing that the vision of Globex intended – expanded access around the world. Today, customers access Globex from more than 150 countries and foreign territories. The policy also paved the way for markets in other parts of the world to access CME Group products. For example, in 2010, Bursa Malaysia Derivatives Berhad (BMD) migrated all of its derivatives products onto Globex, including their benchmark crude palm oil futures contract. The agreement between CME Group and BMD provided greater accessibility for both local and international traders through a level of global distribution that was impossible 20 years ago. And it provided a boost in volume to BMD products. We now have a number of key international relationships with several exchanges.
Today, global market access to our benchmark products are key to liquidity and price discovery. Watch CME Group chief information officer Kevin Kometer, and senior managing director of our global operations Julie Holzrichter talk in this video about the how our technology works today.
CME Group’s Global Command Center in Chicago monitors and supports CME Globex.
Despite the many enhancements in speed and capabilities over the last 20 years, the potential for electronic trading has barely scratched the surface. The next generation of Globex occurs this year, as speed will be increased from milliseconds into microseconds.
The availability of electronic trading is not just about speed. It also provides global access to all kinds of traders, which can boost new product development, allowing futures to be traded in novel and inventive ways. The S&P e-minis breakthrough provides a good example. The appeal of electronic trading is linked to the convenience of immediate fill reports and the ability to trade on an equal footing with anyone in the world. Where once the E-minis followed the standard sized contracts, the situation is reversed and E-minis represent the main liquidity source.
The future will likely bring increased demands on bandwidth, speed and access to liquid markets as more trading – especially over-the-counter products – moves to the screen, and new technologies emerge to support it.
But as the times change, Globex will evolve just as it has over the last 20 years. And traders around the world will be able to get some sleep, even as markets are traded on screens in other reaches of the globe.
Watch Kevin Kometer and Julie Holzrichter discuss the evolution of CME Globex
From the archives: Read our story from 2011 on how market participants are using Globex.
John Labuszewski is managing director of financial research and product development at CME Group.
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