Dealers earned their stripes

In Autumn 1998, the London International Financial Futures and Options Exchange (Liffe) faced its biggest crisis. Its market share of German bund contracts had fallen from 70 per cent to nothing, a loss of nearly a third of its revenues.

The Deutsche Termin Borse (now Eurex) had introduced screen trading ahead of its London rival, cutting both trading times and expenses. Liffe, which was still using "open outcry" trading, had become a dinosaur almost overnight.

In response, new management was brought in, including Brian Williamson as chairman and Hugh Freedberg as chief executive. Both galvanised Liffe to introduce a competitive screen trading system and within the next year it had developed Liffe Connect, a system that has become the European standard for futures and options transactions.

The next three years saw a big turnaround. In 1999 it won a battle between against Eurex and Matif (a French exchange) to control the market in the new euro-based contracts.

"It was not clear which would be the lead player," says Mr Freedberg. "But it was obvious our system could trade contracts the others could not."

The exchange later converted from mutual to corporate status and was taken over last year by the pan-European exchange platform known as Euronext - which combines the French, Belgian and Dutch exchanges.

Over a three-year period its share of the futures and options market has quadrupled. In 2000, it traded 131m contracts; by 2001 this had risen to 216m and in the first quarter of 2002 it has increased volumes by 20 per cent over the same period last year.

Liffe's decision to accept the Euronext bid caused a storm, particularly as it had rejected a higher bid from the London Stock Exchange. However, Mr Freedberg says it made "compelling sense".

Euronext was stronger in the equity and index-based derivatives, while Liffe specialises in trading Euribor and sterling short-term interest rate contracts. Both sides gained new products, customers and markets.

Liffe's ambitions to create US links have been more problematic. A new derivatives joint venture between Nasdaq and Liffe has been approved, but Liffe has been unable to get the go-ahead from regulatory authorities in the US to trade single stock futures.

"The US has put up the most unreasonable barriers," Mr Freedberg says. "We would like to offer non-dollar single stock futures to US residents but regulatory barriers make that impossible. They are cloaking protectionism with compliance."

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