When it opened its doors last summer, the New York Futures Exchange seemed to have a glowing future.
They weren't exactly cringing in Chicago -- where the Board of Trade and the Mercantile Exchange pioneered trading in so-called financial futures, now the hottest area in investments. But there was concern.
After all, the New York Futures Exchange brought to financial futures trading not only the newest in electronic technology, but also the prestige of its backer: the New York Stock Exchange, the world's premiere stock trading floor.
The NYSE, which voted in 1972 (to its current regret) to leave the lucrative options trading to Chicago and other exchanges, was beaten to the punch on financial futures, too. But this time the NYSE decided it would catch up, and fast.
Although the NYSE was five years behind Chicago, Chairman John Phelan said a year ago he felt the new financial futures venture could nab 10 percent of the financial futures business within nine months.
Today, more than seven months after its belated opening, the New York financial circles that the exchange will not survive, although most observers say it is too early to make the judgment. Nonetheless, the futures business is not flocking to New York, and in recent months New York's share of the market has dwindled.
The NYFE's five foreign currency contracts have failed. For all practical purposes they no longer trade. All currency future business remains at the Mercantile Exchange's International Money Market.
The NYFE's share of trading in Treasury bills is paltry, and its small share of the market has shrunk.
Even in Treasury bond futures, where things have gone a bit better, the NYFE seldom accounts for more than 4 percent of the total trading in bond futures and more often than not accounts for about 3 percent or less. The Chicago Board of Trade has the rest. On March 17, for example, the 959 bond contracts traded in New York represented only 1.8 percent of the total traded in New York and Chicago.
Seats on the NYFE, which went to original investors for between $10,000 and $20,000 and sold for as much as $40,000 last October, today can be had for about $15,000.
"The NYFE is not even paying its rent," said the head of commodity trading at a major retail brokerage house. "There is no incentive to use it because the other floors [in Chicago] are so much more fluid. The NYFE is alive, but barely justifying its existence."
"It turns out that the prestige the New York Stock Exchange carries in the equitities [stock] field doesn't rub off in the futures field," said the director of commodity trading at another major brokerage firm.
Even at the NYFE itself, where a year ago the mood was as rosy as a Homeric dawn, the tenor is subdued. But William M. Smith, the NYFE president, said he remains confident about the future. Smith concedes that the NYFE did not get off the ground as fast as he and others anticipated, but said that in bond trading the exchange is holding its own, and that in six months it has as many brokers and generates the level of trading it took the Chicago Board of Trade to develop in 22 months.
"That may be true," said a major brokerage official. "But Chicago was developing a product from scratch. The NYFE jumped in with contracts in proven financial futures. It's not fair to compare Chicago in 1975 and New York today."
Financial futures, like commodities futures, are two-sided contracts in which one party (the long) agrees to buy a specified amount of, say, Treasury bonds at a specified interest rate at a certain date in the future while the other party (the short) agrees to deliver those bonds.
The price of the contract fluctuates daily. If interest rates rise, prices fall, and vice versa. Deliveries seldom are made. Usually the contracts are sold before expiration, with one side taking a loss and another realizing a gain.
Most big brokerage houses keep links to the New York floor and do trading for their own accounts there, but are fearful of transacting business for their retail customers there. Because trading is so light, the brokers say they fear they could not get a customer out of a New York contract fast enough. Instead they direct the business to Chicago, when tens of thousands of contracts are traded daily and a customer almost always can find someone willing to take the other side of a transaction, a phenomenon traders call liquidity.
Some observers think the NYFE's decision to trade contracts that already were successful in Chicago is a major part of the New York problem.
They say there is little reason to trade a bond or a bill contract in New York. Although the New York contracts expire in different months than the Chicago contracts and some analysts say they are "technically" better, the advantages do not outweigh the risks of transacting business on a floor where there is little trading, officials of most big brokerage firms said.
"They should have started with new contracts. That would have given them an opportunity to grow their own open interest [the total of two-sided buy-and-sell contracts outstanding] and develop their own liquidity," said Robert Wilmouth, president of the Chicago Board of Trade. Wilmouth said that so far the NYFE has not attracted enough floor traders with enough capital. "Their only real hope for success is to get a new contract and start trading it before anyone else," Wilmouth said.
"I guess if we had it to do over again, we might put more emphasis on original products," said Marshall Harrison, president of M.C. Harrison & Co. Inc., one of the firms, called locals, that trade in the pits of the NYFE, both for their own accounts and for customers. Harrison, who for six years was a member of the Chicago Board's options exchange, said he has been losing money -- as expected in any new venture -- but expects the NYFE to become a financial success.
The New York exchange is trying to develop "original products" now. It has applied for permission to trade a contract in bank certificates of deposit. hSo has the Chicago Board. The Commodities Futures Trading Commission must grant permission to begin trading in the contract -- and conceivably could approve New York first, Chicago first or both exchanges at the same time. It also could disapprove either or both contracts.
The New York exchange also is exploring whether it can devise a contract that "guarantees" the owner that if he or she must get out of the transaction, the offsetting contract at a price equivalent to the one prevailing in Chicago on a similar contract. Although the legalities and other niceties of the approach have not been worked out, Such a "guarantee" could remove some of the resistance to an exchange where trading is sparse.
The NYFE, like its Chicago competitors, is looking at other potential contracts, including options on Government National Mortgage Association certificates, options on Treasury bonds and futures trading in contracts linked to one or another index of stock prices.
The New York exchange is far from ready to throw in the towel. Smith said he is confident that the electronic superiority of the NYFE floor and the technical superiority of the contract traded there eventually will lure more and more investors away from Chicago. Furthermore, he said, because the NYFE can serve investors faster, the small investors are better served in New York.
While there may not be enough liquidity for big traders, there is for small traders.
Despite Smith's confidence, the facts tell another story. The NYFE share of open interest in Treasury bill contracts has fallen from 2.2 percent in December to 1.6 percent today and in bonds from 2.5 percent to 1.6 percent. i
Even if the talk at the NYFE has changed from expecting exponential growth to more gradual growth, the performance has changed from slow growth to slow shrinkage. Its busiest day in both Treasury bonds and Treasury bills was its opening day.