\-\-\-\--Original Message\-\-\-\--\
**From:** John J. Lothian \[mailto:jlothian@pricegroup.com\]\
**Sent:** Friday, December 19, 2003 5:03 PM\
**To:** submissions@cftc.gov\
**Subject:** US Futures Exchange Application for Designate Contract
Market Status

Ms. Jean Webb

\|Secretary, CFTC

 

 

Dear Ms. Webb:

 

I am writing today not in favor of or against the application by Eurex
to launch a U.S. based exchange. Rather, I am writing in favor of
markets structured fairly and regulated effectively. I am writing in
favor of markets designed to promote price discovery and to fairly serve
the economic interests of all its users. I am writing about marketplaces
that protect the interests and rights of all participants, large and
small. Some of the aspects of Eurex US\'s plans do concern me in regards
to effective regulation, fair and open price discovery and protecting
the interests of all participants. Thus, I ask you to consider their
application carefully relative to these concerns.

 

Market integrity must not suffer in the name of competition and as we
have seen in the Enron/CFMA case, poorly constructed market structures
and ineffective regulation can have devastating consequences.

 

I am a futures broker based in Chicago with The Price Futures Group,
though I am writing to you on behalf of myself, not my employer. I am
also the publisher of the John Lothian Newsletter, which is a daily
email briefing intended help traders, investors, industry professionals
and others manage the historic level of change impacting our markets.

 

As the head of an electronic trading operation I am a strong proponent
of electronic markets that provide increased access, speed, efficiency,
opportunity, surety and flexibility to my clients. However, I am also a
vocal proponent of open outcry markets, especially ones where technology
has not been adequately developed and/or adopted by the marketplace to
handle the complexity of that which is accomplished in a physical
trading pit setting.

 

Perhaps the best example of this is the futures options trading in the
U.S. Everyday in my newsletter I track the percentage of electronic
futures options trading at the CBOT and CME. Day in and day out the
average percentage is less than 2%. The 2% that trade electronically at
the CBOT will trade on the same Eurex trading platform for the new Eurex
US exchange. Option trading is effectively a recent addition to our
derivatives markets after being banned in the Commodity Exchange
Authority in 1936 by an act of Congress and reauthorized in 1982. What
caused Congress to ban these very useful financial tools was the lack of
effective regulation to protect both buyers and sellers.

 

A centralized marketplace, either electronic or open outcry, allows for
better regulatory surveillance of the markets. However, off market
activities are more difficult to police and I ask you to carefully
consider these activities when considering Eurex US application.

 

A centralized marketplace also allows for the greatest number of traders
to interact with each other. That interaction creates the price
discovery that is at the center of our market\'s purpose. The more a
market is decentralized with non-central order book or pit-based
transactions, the less effective price discovery is. The more
decentralized a market is, the less effective and more costly the
regulation of that market is. It is far easier to regulate a market
where you know the participants and can see them or their electronic
activity. The proliferation of online chat is one example of a
communications medium that is widely used in the OTC and futures
communities, but which is not adequately or effectively addressed by
current futures market regulations.

 

As a broker whose clients are mostly individuals who would be classified
as retail, I am concerned about the impact of some of the rules in Eurex
US\'s application that tend to favor larger participants. Eurex has
mentioned in presentations I have attended that it will provide a fair
and level playing field to all participants, yet by their vary
definition a block trades occurrence are excluded from public knowledge
for a time. This is not a fair and level playing field, especially when
current technology allows for must faster, open and effective
communications and trade reporting.

 

Block trades of such small size as are regularly executed efficiently in
the trading pit or on the electronic market in the order book are hardly
economically justified. One has to question the economic justification
for low block trade thresholds when transparency, speed and surety are
offered in electronic trading. The justification for a block trade is
often that a client wants one price. Average pricing rules easily allow
this for with competitively executed orders without changing the venue
or manner of order execution.

 

I am a big proponent of competition and look forward to Eurex US\'s
entry into marketplace to give my clients choice. I look forward to all
markets where open, fair and transparent markets are easily available
for all to interact with each other.

 

Thank you for your time.

 

Regards,

 

John J. Lothian

Publisher

John Lothian Newsletter