As the derivatives industry gathered at FIA's IDX 2019 conference in London, familiar issues like Brexit remained the regular topics of conversation.
But perhaps more important was a broader and more philosophical discussion at IDX among the world’s leading derivatives exchanges concerning the fundamental purpose of derivatives markets in modern global economy.
"Ultimately, we're here to serve a real market. And the real market is global, and the real market is dealing with global problems," said Stuart Williams, president of ICE Futures Europe, at an IDX panel discussion that featured top exchange leaders from around the world. "We have to take a step back from this tendency of focusing on local nuances and get back to a world where we interact on global scale in wholesale markets on the basis of principles, and allow for nuances in local regulation."
Those principles should involve fostering interconnected markets that offer transparency and trust, panelists agreed, regardless of the political issues of the day.
Hiromi Yamaji, president and CEO of the Osaka Exchange, noted that a planned merger between Osaka's parent company JPX and the Tokyo Commodities Exchange is not part of a strategy to insulate itself from regional competition but to in fact "flourish with China in cooperation." Yamaji pointed to a recent cross-border investment scheme linking Japanese and Chinese stock markets though ETFs as the latest regional efforts to "help the Chinese market internationalize itself" in regards to both equities and futures products, and pointed to potential commodity arbitrage opportunities between China and Japan as another way that the two countries could work together to better serve markets in an era of increased globalization.
Another topic discussed during the panel was the recent move by several futures exchanges to implement slight delays on certain types of orders to protect market makers. Some market participants have argued against this move, saying it adds complexity to market structure, but the exchange executives argued that it helps create a more efficient marketplace.
Eurex CEO Thomas Book asserted that speed bumps—such as the one launched by his exchange in June on equity options—are very much in line with his firm's "broader market structure roadmap that strengthens the price discovery in our markets."
It's not about discriminating against a certain user group like high-frequency traders, Book said, conceding that that HFT's are "essential and important liquidity providers." Rather, speed bumps are about "fairness in price discovery" and an effort to offset the "inherent advantage" of aggressive traders versus those maintaining and updating the orders and "at risk of being picked off."
ICE's Williams agreed with Book's sentiment; ICE recently self-certified similar passive order protection functionality on its U.S. futures market to delay aggressive orders in certain gold and silver futures.
"We are building markets for real, physical participation," Williams said. "In certain markets, building liquidity is a challenge and getting people to put in passive orders so there's resting liquidity in the order book for physical players to look at can be difficult, particularly in markets where there's a disparate range of pricing information."
Beyond discussions of price discovery at IDX, exchange leaders also talked about the impact of the ESG movement on the finance industry and the importance of finding a great purpose than simply being a dispassionate market utility.
Matthew Chamberlain, CEO of the London Metal Exchange, spoke passionately about how sustainability standards may well be "the single biggest driver of our industry over the next 10 years."
"When you run a commodities exchange, you price off the worst thing that can be delivered on your exchange. You always discover the price of the worst ton of metal or whatever it might be. So you have this fundamental role in setting the standard against which you price, which actually becomes the common currency out in the broader world," Chamberlain said. "Historically that has been about metallurgical quality, but what we're being challenged to do now by our customers and our members and overwhelmingly by our staff is to go beyond that and say standards apply to the ethical conditions in which things are produced, like responsible sourcing and the way the trading community behaves."
Book commented that derivatives markets are well-suited for supporting this movement by helping society allocate capital to clean energy and other ESG themes.
"I've been doing this for more than 20 years now because I am really passionate about organizing and shaping markets," Book said. "And I believe fundamentally that there is no better allocation tool invented than markets."
