Searching for the missing link
In the past year there have been further attempts by derivatives exchanges to head off the shift of liquidity towards OTC markets. The most prominent example was the CBOT's joint agreement with OTC brokers Prebon Yamane and Liberty Brokerage. The two brokers will be taking a 49% minority stake in the exchange's existing Chicago Board Brokerage. If all goes according to plan, exchange members will be able to trade government securities and repos from screens on the floor of the exchange from late summer.
The statistics certainly support the strategic logic of the CBOT's move. Though total derivative activity has been on the increase, the exchanges' share of it has been declining. The International Swaps & Derivatives Association reported a rise of more than 20% in OTC derivative activity in the first half of 1996, while CBOT volumes rose by just over 2% year on year between 1995 and 1996.
Exchanges that have tried to beat, rather than join, the OTC market have not prospered. The Philadelphia Stock Exchange was in the forefront of this approach with its customized and exchange-cleared foreign exchange contracts, but volumes have been falling.