It wasn’t so long ago that the Chicago Mercantile Exchange was lagging behind its European competitors. But under the leadership of CEO Craig Donohue and CIO Kevin Kometer, the futures exchange has massively extended its footprint and has welcomed a new trading floor and new datacenter to the world. By Anthony Malakian
It's called the War Room. On this humid, July afternoon in the Chicago Mercantile Exchange’s palatial South Wacker Street building, technicians are hunkered down, gearing for the launch of the CME’s new datacenter.
CME Group CIO Kevin Kometer is enjoying a quick reprieve as he sips on a Coca-Cola and wolfs down a sandwich. The facility is due to go live in a month and there is simply no time to leave the office for a proper lunch break.
Working lunches have become the norm around the CME of late as the exchange has rapidly expanded its global presence over the past two years—hence the need for a new, state-of-the-art datacenter and the reason why the War Room is adjacent to the CME’s new Global Command Center (GCC).
The GCC is built on top of the old open-outcry exchange. There are so many monitors and gadgets that it looks like it could be confused for a US Army CentCom outpost. But CME CEO Craig Donohue laughs at the comparison. “This is very impressive, but if you see our new datacenter facilities, it sort of makes this look low-tech,” he says.
On Aug. 15, a few days before this issue of the magazine goes to press, the CME’s new datacenter will go live. There are only a few hectic weeks’ work left before this happens, but make no mistake, these are just the last blocks of a plan that has taken the CME years to build.
The New World
In March, the CME opened the Global Command Center, which used to be the home of the lower trading floor open-outcry pits, but those have since been moved over to the Chicago Board of Trade (CBOT) building. Half of the sprawling new trading floor is given over to the Technical Operations Command Center, while the other half houses Globex, the CME’s electronic trading platform.
At 35,000 square feet, the GCC brings the Globex Control Center, technology operations and all other critical support teams together under one roof. It provides 24-hour monitoring of the CME’s global technology infrastructure and market operations, global news and market information, and geographic mapping of incoming customer calls, and features 43,750 yards of cable with more than 400 workstations and 2,000 monitors. The monitors that act as a hanging halo around the floor provide a real-time view of how the exchange is performing. Today it is seeing a roundtrip time of 2.45 milliseconds for trades made in euro-dollar futures.
But being only a few months old, it is a relatively quiet, sterile environment. The CME has approximately 80 empty seats littered throughout the GCC, most of which have been created by the partnership with Brazil’s dominant exchange, BM&FBovespa. Later in the day, Kometer will attend a job fair held downstairs at the South Wacker Street building. And his weekend will be dominated by an early Saturday morning mock trading session with Bursa Malaysia.
For Kometer, the need for a new trading floor was clear: “When you’re growing this fast, you have to have options on the floor,” he says.
Kometer has enjoyed a long career at the CME. During his 16 years at the exchange—sans a two-year stint when he worked at another firm—he has helped oversee the CME’s technology expansion, first under the wing of former CIO Jim Krause and then as CIO starting in 2008. Kometer has gone through two major integrations in his time at the CME: the CBOT acquisition in 2007 and the New York Mercantile Exchange (Nymex) merger in 2008.
Over the past few years, the CME has entered into nearly a dozen partnerships with exchanges, across Asia, Africa, the Middle East, and Central and South America. Clearly, growth was a prerequisite to justify the funding and building of a new trading floor, much in the same way that it provided the impetus for the new datacenter, located in the Chicago suburbs.
With a month to go before the new hub’s go-live date, technicians are preparing to move Globex from the old datacenter to the new one, which features all new hardware. They have already implemented the infrastructure, established network connectivity, built new racks and machines, and configured Globex. All that remains is conducting switch failures, network and reliability testing—which entails intentionally “failing” boxes and switches—performance and functional testing, and ensuring that all the firm’s bases are covered.
The greatest advantage this new facility offers the CME is establishing itself in the high-frequency trading realm—which it didn’t do much of before as a proximity provider—through a new world of co-location offerings. While both Kometer and Donohue are quick to point out that this is not specifically being done for high-frequency traders, these types of firms have expressed a great deal of interest already.
“It’s not just for high-frequency traders, but they have shown a great deal of interest,” Kometer says. “Now that we have built our datacenter—and it’s a very large datacenter—we have enough space to get into the co-location service. We’re in the process of working on a ‘co-lo’ strategy and figuring out what types of services we are going to provide to the customers.”
The CME wasn’t able to divulge latency times as the facility was not yet up and operational, although it will be using “internally written tools to capture statistics on latency through every touch point within its infrastructure,” says Kometer. “Therefore, we know how much time an order spends in iLink, in our matching engines, and through quote dissemination. As things have become faster we have been able to improve our tools to work more precisely even in the smallest time frames—going from milliseconds to microseconds, and one day, to nanoseconds.”
The reduction of latency has been all the talk in South America. In this respect, it’s hard to mention Brazil without acknowledging the CME’s contribution to the marketplace, and, more specifically, BM&FBovespa.
“The partnership was key in terms of cutting latency and improving our trading processes,” says Marcio Castro, IT director for matching systems at BM&FBovespa. “It’s all about functionality, latency and operational excellence. If you look around, there may be platforms right now that are faster, but they do not provide the level of functionality that we can do together with CME Group,” he says.
Donohue, the six-year-running CEO of the CME, says this partnership, and subsequent moves like it, is intended to help support the continued growth of the exchange. He says one of the things CME is out to prove is that even though it has very large, global, sophisticated customers, these clients can still access Brazil efficiently.
Donohue describes the BM&FBovespa hook-up as a one-to-one relationship, although, he says, the more partnerships the CME creates, the more liquidity spots customers can access and they can transition from this one-to-one relationship into a one-to-many structure.
“We are a unique exchange company in that almost all of our products are globally relevant products—foreign exchange, commodities, energy, interest rates. For a hundred years our emphasis was on US markets and US customers. If you look at our liquidity patterns, we have very deep liquidity in all our core products, certainly during the US trading day. But our goal with globalization is to extend that trading day to 24 hours for people trading our globally relevant products in Asia and in Europe.”
When the CME first partnered with BM&FBovespa back in 2007, it was thought to be a north-south play to help US firms break into the South American market and vice-versa. The agreement on the order routing side is designed to increase distribution capacity, volume and liquidity for the exchanges, as the two parties partner to create a new trading platform in Brazil. But what they have found is a great deal of interest emanating from European and Asian high-frequency trading shops looking to wet their beaks.
It wasn’t that long ago that Europe was the center of the commodities world—now it’s Chicago leading the charge. The exchange has entered into numerous global partnerships over the past few years outside of Brazil, including Bursa Malaysia, the Dubai Mercantile Exchange (DME), the Johannesburg Stock Exchange (JSE), the Korea Exchange (KRX) and the Singapore Exchange (SGX). This year it has entered into a cross-listing agreement with National Stock Exchange of India (NSE) and an order-routing agreement with the Mexican Derivatives Exchange (MexDer).
It is the MexDer agreement, scheduled to come into play in the first quarter of 2011, that has garnered the most industry attention as analysts consider whether the CME can repeat its Brazil success with Mexico. The parallels are striking to Donohue: “We certainly believe there are similarities. We take a very long-term view of what it means to be a strategic partner,” he says. “My hope would be that similar to what we are doing already in Brazil, we will build on this initial step with MexDer and look for other ways to increase our partnership and the scope of what we are doing together.”
There was a time when the CME was the upstart to the established New York Stock Exchange (NYSE) and European futures exchanges. But now, the CME, which dominates the futures landscape in the US and is rapidly spreading its wingspan around the globe, has found a new challenger in the form of ELX Futures, made up of a consortium of banks, which launched last month. NYSE Euronext’s COO Lawrence Leibowitz went on the record in March with Reuters and said that NYSE and ELX could partner some time in the future.
ELX is currently trading in US Treasury interest-rate futures with an extremely aggressive fee structure, but many have their doubts as to how successful it will be in loosening the CME’s stranglehold on the futures market.
“ELX has not been disruptive yet as it is not that easy to run a consortium-led initiative,” says Sang Lee, co-founder and managing partner at Boston-based research firm Aite Group. “If they can get their act together—and that’s a big ‘if’—they could become disruptive. I don’t know if aligning with the NYSE would add anything significant to the overall equation other than yet another set of decision makers to go through.”
Lee adds that from a competition perspective, the CME is in a better position compared with NYSE Euronext simply because it dominates the futures market in the US, whereas NYSE faces constant pressure, especially from an equities perspective.
“The CME is in a much better position because they have the clearing, which is vertically integrated and that certainly makes it much easier for them to defend their turf,” Lee says. “If you’re a high-frequency trading firm and you’re interested in low-latency trading, you will have no choice but to go onto the datacenter that the CME will be building out. If you are a NYSE client and you want to trade NYSE securities, you have multiple venues where you can do that. NYSE’s strategy is a much harder one to execute, whereas the CME’s is a little bit easier, and they have leveraged their Globex platform to build relationships with other exchanges and have invested in those platforms.”
Clear and Present Opportunity
It is on the clearing side that the CME will likely look to move ahead. Lee says there will be more clearing partnerships created in the future. While the clearing piece of the puzzle may not be as glamorous as the execution piece, it is arguably more important in terms of the future growth of the markets the CME is entering into, he says.
“If you have various exchanges using the same clearing platform, from a user perspective managing risk is a lot easier,” Lee says. “That’s the Holy Grail—a single clearing firm to trade in multiple venues across the globe and manage your collateral and risk more efficiently. You would save so much just on risk capital alone.”
The CME has successfully entered into clearing relationships with the DME, SGX and The Green Exchange, but Donohue says that while he is examining new clearing opportunities, he is taking it slowly because of the inherit risk that comes with the territory.
“I do think that we will look to do more in the clearing space, but that’s an area where we also have to be very careful because any time you have clearing relationships, you’re dealing with substantial amounts of risk,” he says. “You can get into sovereign risk issues, bankruptcy risk issues. It’s complicated, but we have done that successfully when it’s very carefully structured.”
The Future of Futures
There are other areas where Donohue and Kometer see room for advancement. Sitting in a posh lobby a few halls down from the Global Command Center, Donohue’s eyes light up when talking about the opportunities that exist for index services and products.
“Earlier this year, we entered into a new line of business by acquiring 90 percent of the Dow Jones Index business and in general we are looking to increase the amount of index products that are developed—you have stock indexes but there are also commodity indexes, energy indexes, and indexes of foreign products,” he says. “That’s an area that we like a lot and that’s a substantial acquisition that we did to move us in that direction. It’s not an area that exchanges have typically been actively involved in, but even in the short time since we acquired the majority of that business, we have already begun developing interesting products like inflation indexes.”
And then there’s the over-the-counter (OTC) derivatives space. The Dodd–Frank Wall Street Reform and Consumer Protection Act, which Congress approved in July, looks to address how derivatives are routed, which might present challenges for the CME, the most notable of which is whether or not ClearPort, the CME clearinghouse for OTC swaps, will need to apply as a Swap Execution Facility (SEF). However, according to Adam Sussman, director of research of New York-based research firm Tabb Group, there will also be opportunities. “Given the CME’s experience in derivatives, they are well-suited to try and capture that opportunity,” he says. “The issue is, how much of the OTC derivatives market will be centrally cleared and can the CME be the front-runner in providing that centrally cleared product? There is the possibility that some of the market won’t be centrally cleared, but will be traded in more of an electronic or exchange-traded fashion—that’s another opportunity.”
This notion of opportunity through regulation is not lost on Donohue. “Obviously the Dodd-Frank Act requires that standardized swaps be cleared on a clearinghouse and traded on an exchange. That will be a catalyst for additional contracts being cleared through CME ClearPort or through CME Clearing. That’s an area that we have a lot of focus on.”
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