ICE Poaches Russell Futures Contract From CME: Major Shakeup Brewing

A major shake-up is rattling the futures exchanges, and it looks as if the drama will continue for some time. In a deal that will likely cause a sizable shift in trading volumes in the world of index futures, the IntercontinentalExchange (ICE) announced on Monday that it has acquired exclusive licensing rights to the Russell indexes for futures and options on futures contracts.

ICE already has several futures and futures on options contracts based on the Russell indexes trading on its New York Board of Trade [NYBOT] subsidiary, but the exclusivity agreement means that the Chicago Mercantile Exchange (CME) will not be able to renew its license to list Russell-based futures contracts. Currently, futures contracts based on the Russell indexes represent roughly 3% of the CME’s total trading volume, and 10% of its equity index trading volume. Those are small percentages, but rather big numbers: As of the end of May, the exchange’s total volume for Russell-linked products year to date was more than 14.5 million contracts—most of that attributable to the E-mini Russell 2000 contract. The ICE, by contrast, had a total year-to-date volume of less than 250,000 Russell-linked contracts.

The ICE currently lists contracts on the Russell 1000, 2000 and 3000 indexes in addition to the growth and value subindexes of the Russell 1000 and 2000 indexes. However, it only began trading futures and mini futures contracts on the Russell 1000 on June 15. It expects to begin trading in mini Russell 2000 futures contracts by August 29.

“Russell has really wanted to grow its franchise and felt like we could give it the attention and advocacy the (Russell 2000) contract deserves because of its leading status as a benchmark for mutual fund managers,” says Kelly Loeffler, vice president of investor relations and corporate communications at ICE.

Although the ICE is primarily known for its energy and soft commodities contracts, Loeffler says that when it acquired NYBOT it also acquired the world’s leading marketplace for Russell 1000 contracts.

Russell has been pleased with its relationship with the CME and, in particular, with the growth of the E-mini Russell 2000 contract, says Russell spokesperson Jennifer Tice.

“However, we have decided to move our contract exclusively to Intercontinental Exchange in order to grow investable products on the entire family of Russell Indexes, including the Russell 1000,” said Tice. “Russell chose ICE because we believe they offer the best advocacy potential for our entire family of Russell Indexes, especially in our quest to increase the number of products based on Russell 1000 and our other U.S. equity indexes.”

The CME has said that it will list the Russell contracts through the September 2008 expiration date of its agreement.

Mixing Up The Merger
Adding to the drama is the fact that the CME is on the verge of merging with the Chicago Board of Trade (BOT), with a shareholder vote scheduled for July 9. Its chief rival in the negotiations is the ICE, and some speculate that the ICE’s poaching of the Russell contracts may weaken the CME’s bid.

In a further twist, the day after the announcement regarding the ICE, the CME announced that it would begin listing E-mini Small Cap Stock Index futures contracts based on the S&P SmallCap 600 Index. The CME says that it will offer trading incentives and execution facilities that will encourage traders who have previously used the Russell 2000 contracts to use the new S&P-based contract. The exchange already lists a full-size contract based on the S&P SmallCap 600 Index, but its volumes are extremely thin.

Mary Haffenberg, associate director of product communications at the CME, does not classify the E-mini Small Cap Stock Index futures as a replacement for the E-mini Russell 2000 futures and says the exchange is responding to demand from investors for more small-cap trading vehicles. “It’s to give investors another way to trade that type of product,” she says.

The CME also says that it will be working with S&P to develop more equity and fixed income products.

Haffenberg points out that the CME’s electronic platform, CME Globex, is one of the most widely distributed trading platforms in the world for futures contracts. She notes that the volumes of the E-mini Russell 2000 futures contracts that are traded full time on the electronic platform far outpace those of the full-size Russell 2000 contracts that trade on the floor during exchange hours and on the electronic platform. The obvious conclusion to this would be that the size and convenience of the e-minis are major contributors to their volume.

However, the ICE built its original business on electronic trading, and it will be launching its own mini Russell 2000 futures contracts, followed by options on the mini Russell 2000 and the mini Russell 1000 futures contracts. More Russell products already available in open outcry trading via the NYBOT trading floor, including the futures on the Russell 3000 Index and the Russell 2000 growth and value indexes, will also be made available on ICE’s electronic platform after the introduction of the mini Russell 2000 contracts. The full-size and mini Russell 1000 futures contracts are already traded on the electronic platform in addition to via open outcry. The exchange says that any new Russell index futures products will not be available through open outcry trading. It also says NYBOT will work with Russell to identify and prioritize other indexes for use as the bases for tradable products.

With the shareholder vote on the CME-CBOT merger coming up in July, and the launch of the first mini Russell 2000 not happening until August, it looks as if there are more events to unfold before the effects on the index futures markets become known.