Milling & Baking News - June 7, 2005 - 8

E D I T O R I A L

Tough issues in deciding about futures exchanges

or the entire grain-based foods industry, the inevitability of great change in the way futures trading in
wheat, corn, soybeans and other agricultural commodities is conducted looms ever closer to reality. The
combination that appears to be on the fastest track not
only embraces electronic trading and the parallel decline
of open outcry markets, but the transformation of the ownership of the exchanges themselves from mutual partnerships owned by members to corporations owned by public
shareholders. Considering the huge consequences of these
possibilities in essential price-determining mechanisms
called futures contracts, it is difficult to imagine anything
else of equal, much less greater, consequence.
In many ways, the likelihood that within the not too
distant future electronic communications networks will
become the dominant trading platform in wheat and
other grain futures may be of lesser importance than
what may happen to the governance and ownership of
exchanges. Exchanges with publicly-listed shares cannot help but have a different governance structure from
markets where ownership relates to trading privileges.
As the New York Stock Exchange has proposed in its
merger with Archipelago Holdings, trading privileges
will be separate from ownership. The right to be a broker
or floor trader will be awarded through a vetting process
and the payment of fees, replacing the trading privileges
that long have gone with membership.

Trading volume not a problem
No one questions but that such a revolutionary change
is meant to address the many difficult issues that have
been before, and even plaguing, the exchanges. While each
exchange has its problems, the basic matters under study
have much in common. It is interesting that for the most
part the level of business is not the problem, with many exchanges enjoying record volumes in both agricultural commodities like wheat as well as in the financial derivatives
that now account for the major share of trading. According
to the Bank for International Settlements, the aggregate
of trade in futures markets and stock options around the
world in 2004 had a record-setting value of $1.4 quadrillion
(a number with 15 zeroes, as compared with the 12 in trillions and nine in billion). The mind-boggling global aggregate was up an ebullient 31 per cent from the prior year.
The commonality of issues may best be illustrated by
recent developments at the N.Y.S.E. Happenings in Chicago also help to describe the multiple forces at work. The
events at the N.Y.S.E. stem from a series of management
and regulatory boondoggles that led to the naming of a
new chief executive who had the mandate for change, as
well as the power to effect a merger into one of the leading electronic communications networks. The dual goal
guiding much of the exchange's innovation, it appears, is
to access a successful trading system and to obtain equity
for members in a business already publicly listed.
Considering the culture on the floor of the N.Y.S.E., it is
to be expected that the initial criticism of this move centers on allegations that members are not receiving shares
and cash of sufficient total value. These objections combine with dreams of attaining magnified values through
an initial public offering. Those clamoring for a public
offering often cite the Chicago Mercantile Exchange
where shares soared many times after their introduction, although the C.M.E. performance in 2005 had been
less than stellar until a sharp upward reversal last week.
bakingbusiness.com / world-grain.com

All of this has tended to center attention on steps aimed
at maximizing value from operating exchanges and
bringing the equity into the public marketplace. Several
mergers in Europe, and even hostile takeovers by one exchange trying to buy another, are credited with boosting
expectations. The scene resembles what occurred during
the technology "bubble" of five years ago.

Clouded debate on best platform
This focus (some might say it's greed) on maximizing
value from a deal that would transfer exchange ownership from members to the public marketplace has clouded
consideration of the other issue of equal importance to
grain-based foods. Open and clear-headed debate to decide between open-cry trading on the exchange floor and
electronic trading must not be swept away by the rush to
I.P.O. Without taking sides as to which approach is best, it
seems that careful consideration of the trading format has
been given second fiddle to efforts to capture the value of
exchanges in the public equity market. It is almost as if an
exchange without electronic trading as the dominant, if not
the sole, form of price-making has a value that is considerably less than the historical marketplace might assign.
While electronic trading proponents are apparently winning the day based on their assertions of gains in trading
speed, in efficiency and clarity of execution, and in reducing costs, the personal service and the historical strength
offered by open outcry trading still wins many plaudits.
The N.Y.S.E. goal to maintain floor trading side-by-side
with the electronic communications network it owns will
help fuel, and may even finally decide, the verity of the
oft-stated assumption that the E.C.N. always will carry
the day. But at this stage, any decision affecting wheat and
the other agricultural commodities must be reached in an
atmosphere not totally ruled by a potential "pile of gold."
So much is at stake as these decisions are made that the
pell-mell speed of some of the exchanges is worrying. The
decision to be made, as significant as it may be, is not just
about the right form of trading. It encompasses granting
and paying for trading privileges. It takes in deciding who
should have control of how the market operates, who makes
its rules, and who has the final say. A board responsible to
public shareholders is a board with considerably different
allegiances than currently is the case at most exchanges.
Long and hard battles were fought over many years to
keep control in the hands of the exchange membership,
with a powerful voice also assigned to a market's "consumers." Much of this effort centered on minimizing
governmental intervention. The latter included fighting
to assure that the agricultural futures markets continue
subject to the surveillance of the Commodity Futures
Trading Commission while keeping the Securities and
Exchange Commission at more than arm's length. Bringing public share ownership to these markets obviously
gives the S.E.C. a direct role in any such futures market
that may result from a drive for single agency supervision by the federal government.
Sure there are many plusses to the current changes
under way in the ownership and trading platforms of the
major commodity and security exchanges. What have not
received adequate consideration are the many negatives
raised by this prospect of great change. Unless these are
carefully weighed and decisions are made without untoward pressures, moving in a direction that seems well
worth doing might turn out to be a mistake. MBN
Milling & Baking News, June 7, 2005 / 9

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Milling & Baking News - June 7, 2005

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