ECNs and dark pools have been available for equities for well over 20 years. Why are they off-limits to futures market? Considering that CME, which also operates NYMEX and CBOT, is practically a monopoly, isn't it about time?
Exchanges (mostly) guarantee contract delivery, which eliminates counterparty risk. A notable recent exception is Nickel on the London Metals Exchange.
"Another reason a darkpool wouldn't work so well in futures, is that the universe of traders isn't big enough. There really aren't that many people out there with order sizes that large. It's not like equities where there are literally thousands and thousands of people moving very large blocks of shares around." Fungibility would be an issue - just ask Eurex. From the net.
You seriously expect me to believe that (nonsense)? The world of commodities isn't only congregated by speculators. There are also the whales. They are the big hedgers, like multinational conglomerates, hedging themselves against shock future shock. When all is considered, liquidity should not be an issue. When it comes to fungibility (if I correctly understand that term), thinly-traded stocks shouldn't be allowed on ECNs, but only the MSFTs and AMZNs. But we know that stocks with thin volume also go through ECNs.
Since I don't actively trade metals other than gold, I'm not at all familiar with this turn of event. But when it comes to counterparty risk, doesn't that also apply, if not more, to equities? There will always be some form of risk in all instruments, and I just don't see the rationale that using ECNs would somehow make that more risky than with a physical exchange.
There are many many big futures exchanges in this world : Intercontinental Exchange (US, Europe, Asia Pacific ...) National Stock Exchange of India Korea Exchange Shanghai Futures Exchange B3 Brasil Bolsa Balcao Exchange Dalian Commodity Exchange China Moscow exchange Hong Kong Futures Exchanges LME There are also many small futures exchanges that have been around for years : Bursa Malaysia BMD Dubai Merchantile Exchange Hanoi Stock Exchange (incl Futures products ) APEX Asia Pacific Exchange etc These are reputable and established exchanges. Altogether, there are hundreds of Futures Exchanges (big and small) in this world. It wouldn't be easy to compete with these established exchanges.
It comes down to regulation (of brokers) and settlement of trades - they are regulated quite differently. With futures you are actually contracting with the exchange for delivery (or supply). For equities, the exchange is simply a venue for publishing quotes/executing trades - your broker has obligations for settlement of a trade with DTCC (not the exchange), and that model permits any number of exchanges and ECNs to co-exist. Particularly for commodities with physical delivery, they simply developed this way to preserve the continuity of supply for industry, but that does result in some pecularities in pricing (hello Crude Oil April 20, 2020!)
Fungibility is the ability to trade in two venues and have a common clearing house. Exists in stock and options and there is limited fungibility between venues like SGX and CME. CME has monopoly clearing and has not allowed anyone other SGX and their wholly-owned partners in. Eurex started a US-based futures exchange, initially, to trade rates and moved to join CME clearing - it didn't happen and lots of attorneys cleaned up. Eurex joins The Clearing Corporation, which is still a Chicago-based clearing venue, but the products were not fungible and they died. If you could break out the value of CME clearing I wouldn't be surprised if it isn't the dominant value of the equation. Many similar products trade in varied locations, but there is no fungibility. CME also holds monopoly licenses for futures-based trading of some indicies. The same way CBOE holds monopoly licenses for some of the security-based products. SPY was an Amex monopoly at one point, but the courts elected to open that. That litigation relates to tape revenue and I doubt any exchange will make that mistake again.
Thanks guys, appreciate the explanations. I hope (one of these days) they will bust the monopoly wielded by CME.
@ETJ's answer is the closest. The main reason is regulation, in particular SEC's Rule 11Ac1, which was introduced around 2000. This forced market makers to display their quotes into ECNs, which in turn created fungibility for equities outside of their primary listing markets. On hindsight, one could argue this tipped the scales too far in the favor of ECNs/ATSes over primary listing exchanges. And which is why you see ATSes outnumber exchanges in the US equities market. Rule 11Ac1 in turn preempted price protection and market data rules in Reg NMS that further cemented the place of ATSes and ECNs for price discovery in US equities. No such regulation exists for US futures and commodities, so all futures exchanges essentially have a monopoly on the products that they create and list on their own markets, and there is no fungibility outside of their venues.