Wednesday, June 3, 2009

The Debts of the Spenders: The CME - ICE Wars

I started writing about the need for a CDS exchange earlier this year and in the process covered several of the main players: ICE, CME-CBOT (CME Group), and Euronext Liffe (the Europeans). Well, the conflict has widened from the narrowly defined CDS front into a full blown war w/each player seeking to capture market share at the other's expense.


ICE won the first round by obtaining the endorsement of the SEC to run the first federally approved CDS exchange. CME Group was left in the dust as it had sought to enlist the political patronage of the CFTC, which pushed on behalf of its client (as always the line blurs between the private industry and regulatory side at the management levels w/clubroom drinks and golf course agendas setting the pace of regulatory reform). Moreover, CME's fortunes declined as business in fed fund futures fell off in the wake of ZIRP.

Several months later, it seems as if CME is on the rebound as it has benefited from an increase in speculative positions in Eurodollar futures and potentially even the Fed Fund futures. Why? Well, renewed inflationary pressures on the dollar and widespread skepticism about US fiscal and monetary policy have brought a new round of speculative money into bets on future govt policy. Broadly defined, "are we in deflation, inflation, or stagflation?" has taken on new meaning as bettors line up their positions. CME, as a glorified bookie, is benefitting from the renewed monetary inflows.

The war is not just limited to CDS or futures activities either. CME and ICE have taken their conflict to new heights in the precious metals arena and currency futures/options on futures. Liffe has even gotten involved in the precious metals wars w/its NYSE Liffe precious metals platform (p.m. has traditionally been the preserve of the COMEX).

How will things shape up?

Well, for one thing I am cautioning readers to look at the Commitment of Traders (COTs) futures data from another angle - that of the contrarian. An overweighted position in any one area invites a quick and dramatic reversals in the fortunes of speculators and hedgers alike. And by nature, heavy short positions are more likely to suffer quick climbs on the long side as traders scramble to hastily cover. Where can such events happen?

Well, according to the latest COT data: dollar index futures and long bonds.
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