Come for the Pizza, Stay for the Foreign-Exchange Derivatives

Here's something that'll get your head working early on a Monday ─ Chicago is less than two centuries old. It's only a 177-year-old city in fact, incorporated in 1837, with the town of Chicago having formed in 1833 with a population of around 200.

By contrast, New York, in its former life as New Amsterdam, was officially settled in 1624. Edo, which would later become Tokyo, was first fortified in the 12th Century by the 17-year-old Emperor Meiji. The first reference to Moscow dates back to 1147, while nobody really knows how old London is. Timbers have been found by the South Bank that date back to 4500 BC.

Given the relative youth of America's Windy City, it's quite remarkable that it's developed a leading spot in the world as a commodities hub in a fairly short space of time. The Chicago Mercantile Exchange (CME) Group, which has its origins in the Chicago Butter and Egg Board, was established in 1898, although through its acquisition of the Chicago Board of Trade in 2006, it's been a part of Chicago's financial landscape since 1848.

While the CME is a thoroughly Chicagoan entity, being nearly as old as the city itself, then, it still has extensive links to Europe. The CME's offices in London are at One New Change, in the very heart of London's oldest districts, and it's had a presence here for 30 years, one that's been strengthened with the announcement that the long-awaited CME Europe will be launching next month.

You can read more about the announcements from our coverage here and here, but suffice it to say, the fact that all three major US exchange operators ─ IntercontinentalExchange, Nasdaq OMX and now CME Group ─ all have regulated derivatives markets in Europe, operating from London, makes this an interesting time in the continent's venue environment.

While the CME is a thoroughly Chicagoan entity, being nearly as old as the city itself, then, it still has extensive links to Europe. The CME's offices in London are at One New Change, in the very heart of London's oldest districts, and it's had a presence here for 30 years.

Empirical Value
The other highlight from this week has been the release of the European Securities and Markets Authority's (Esma) semiannual report on risks, vulnerabilities and trends. The two items of most interest to Waters readers will be the sections on high-frequency trading (HFT) and central securities depositories (CSDs), both of which receive in-depth examinations from the regulator.

So much has been written about HFT in recent years that you can guess the findings of the report ─ it helps with price and order volume, but it's negatively related to volatility. More research is needed, etcetera etcetera. So far so predictable, but at least Esma actually tries to include a little empirical data with its polemical rhetoric ─ a study of 100 stocks traded in nine countries to analyze the impact of HFT yielded some interesting results, which you can read about here.

On CSDs, too, Esma broke ranks slightly by not only highlighting the fact that, by dint of their position in the market, CSDs are systemically vital institutions (with a subtextual suggestion that they should receive a level of supervision according to that status), but that the rescue of a CSD would be impractical. Primarily because it would rely on trans-border cooperation at an unprecedented degree to implement.

Luckily for the market, however, the delivery-versus-payment model means that there isn't likely to be a full-scale collapse from one incident, but the wider systemic risk environment has been generally heightened by an increasing tendency for CSDs to focus on ancillary services, even with (or possibly because of) CSD Reg and the Target2-Securities project.

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EDIT: It's been pointed out to me by my esteemed colleagues that Chicago's population is actually well below that of London, and that I was taking the metropolitan area figure as rote. The article has been updated to reflect that.