Competition: In Futures Markets and in Your Career

I’ve been thinking about competition and how it acts as a force for change. In the bear markets we face today, I began with who the competitors in the field are, and how their roles and interactions shape the market. Recently, we have seen a trend towards consolidating the power of stock and futures exchanges and reducing competition in the market. For example, the big rivalry between futures exchanges in Chicago spawned the largest futures exchange in the world. The New York competitors, NYSE Euronext and the American Stock Exchange joined forces recently. In Canada, we see the Toronto Stock Exchange gaining control of its main competitor, the Montreal Exchange.

With all these mergers taking place in the markets, where is the competition going? The Chicago Mercantile Exchange (CME) Group admitted that the purpose of their collaboration was to compete with NYSE Euronext on that level of the playing field. In this sense, as the global markets develop so does the competition. But, as the former titans of exchange join forces to better compete on the global stage, they reduce competition within markets.

Then we have the smaller firms getting in on the action as well. To compete with the CME Group in the futures market, heavy hitting investment banks have started forming teams to compete with the future exchanges. While this strategy has had skeptics from the start, their large Chicago rival CME Group acknowledged the purpose of these in-house competitors when they upgraded their platforms to reduce the time to market for block trading as well as the time it takes to make a trade.

Another example of this sort of competition is seen in the effort of Project Boat, a trade reporting system set up by the usual heavy hitting investment banks. It was developed to compete with the European Exchanges after the Markets in Financial Instruments Derivatives (MiFID) initiative was put in place. The MiFID forced European trading firms to report their trades. To keep reporting costs to a minimum, Project Boat acted as an alternative reporting platform. While investors are selling Project Boat to it’s technology provider, they still believe this initiative to be a success. In the three months Project Boat has been in business, it has taken 69% of all the trades reported off exchange platforms, according to the Financial Times.

In this same category of competition, the Project Turquoise initiative debuted to rival the London Stock Exchange. All of these competitors are looking to maintain a fair and manageable marketplace. Where the larger exchanges are looking to compete head to head for the greatest number of trades, these players are achieving smaller but significant goals.

I have applied the lessons of competition that I have learned as an observer of the futures market to my own career and professional decisions as well.

For example, I sit on a medical board benefiting Children’s Memorial Hospital in Chicago. As a board member running for an executive position, I see competition for my position as a stepping stone. Competing against other board members to hold my seat pushes me to be think of new and better ideas, to achieve more, and to be more successful. I welcome my competitors to the playing field and hope that their motivations will inspire me to think of more creative ideas and unique strategies to implement them.

As the markets rise and fall, our certainty as investors and economic actors goes with it. As employees, this is a time of great uncertainty as the government approves a plan to stimulate the economy and we watch our 401k accounts melt away before our eyes. In these difficult times, it is important to recall that, as long as we have healthy competition in the marketplace, the markets have the incentive to rebound build right in. While some experts worry about the fear of recession, historically, as long as markets have been competitive, there has been a random walk with upward drift, meaning that competition helps the market recover from short-term crises to continue its long-term upward trend.