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History of the World Part III

Those of us who have been in the industry for a while will remember what became known as the “Battle of the Bund” back in the early 1990s.The quick version is that newly formed DTB (now Eurex) managed, in just a few months, to repatriate trading in the benchmark Bund futures contract from London based incumbent, LIFFE. It did this by deploying screens across the London market which meant trading was simpler and, crucially, cheaper than the manual floor based alternative offered by LIFFE. This story went on to become a marketing classic on eating your competitor’s lunch as no one had ever thought that liquidity could be moved in such a meaningful way. The Germans tried the same trick a decade later in the US as they sought to disrupt the Chicago duopoly of the CME and CBOT. This time they failed, however, as the lower prices on offer were simply a loss leader rather than based on any fundamental technology advantage. So, all the Chicagoans had to do was drop their prices to match Eurex US and wait until the pesky Germans went away.

Wind onto 2018 and we have round III. This time Eurex is attempting to repatriate Euro denominated clearing from the London based incumbent, LCH. As before, participants are lapping up the rebates and lower fees (why wouldn’t they?) but will this work when “normal” levels of pricing are reintroduced? In this regard, history seems to favour the incumbent unless the newcomer can show real innovation (rather than just price incentives). So, maybe LCH can relax as all it has to do is adopt the same classic defensive approach used by Chicago.

One point, however, may make LCH nervous. Back in 1990, the Germans were able to tap into the prevailing political consciousness at the time. After all, went the refrain, why shouldn’t German based contracts be traded on a German exchange? And, unfortunately, similar political rhetoric now resonates within the political corridors of Europe as the UK squares up for Brexit.

More important, however, is the original lesson. To be truly disruptive you need to operate at or offer a fundamental advantage. Open Access would have created the ideal backdrop for this as trading would have been formally decoupled from clearing. But, as we know, this has been put in the “too tricky for now box” as European regulators contemplate post Brexit capital markets. So, I guess we will just have to sit back and see what transpires. Meanwhile marketeers can see what distinguishes true disruption from simple “me-too” competition.

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