Outlook: Game is not up for Liffe yet

Outlook: Game is not up for Liffe yet

MATIF, the French futures exchange, formally announced yesterday the long-awaited gilts contracts with which it plans to launch its assault on the London market. The DTB, the German futures exchange which has already comprehensively trounced London with an electronically traded bund contract, will be following suit any week. It has been reported elsewhere that "A" shares in Liffe, which give both ownership and trading rights in the London market, have been changing hands at pounds 50,000 and less, against more than pounds 100,000 only a few months back.

Liffe's new electronic trading system won't be up and running until the second quarter of next year, and that's on the highly optimistic assumption that it gets off to a bug-free start. In the meantime Liffe is forced to struggle by on a combination of outdated and costly open outcry trading and its old banger of a screen-based trading system, APT. By the time it gets its new model on the road, there is a real danger the war will already have been lost. Loss of market dominance to Germany in the bund contract is one thing. To lose pole position on a contract based on our own indigenous gilt-edged stocks would be quite another. Liffe is on the slide with a speed nobody would have believed possible even a year ago, many people are saying.

That's the perception, in any case. The reality is a good deal less clear. Liffe has certainly been slow to respond to the competitive threat from Europe, but the necessary reform now seems to be in place. Whether it is all too little, too late must await the judgement of history, but there are good reasons for believing this may not be the case. The first is that the Matif may have constructed its gilts contracts in a way traders won't want to use. The long-dated contract in particular is said to be inferior to its London counterpart both as a hedging instrument and for arbitrage.

Furthermore, there is not enough business in gilts futures to create the required liquidity in three different markets. Business is going to gravitate to one or other of them. A large part of the DTB's success in the German bund contract is down to arm-twisting by the German authorities to get German banks to swap their business from London to Frankfurt. The Bank of England may have to perform the same task in London to give Liffe sufficient breathing space to get its own modern screen trading system up and running.

There is a subsidiary point here which is none the less important for it. In a sense it doesn't really matter whose system is used for these futures trades; the important thing as far as jobs and other economic benefit is concerned is where the trading is taking place. Trading in bund futures may have migrated to the DTB, but it also overwhelmingly still takes place in London.

Even so, it is plainly important if London is to remain Europe's top financial centre that it lays claim to the most liquid and efficient exchanges too. Liffe has taken a beating, but the game is not yet up.