An analysis of the competitive environment of international futures markets

Since 1982, 28 percent of the 335 futures contracts introduced on international futures exchanges failed within three years of introduction. Over time the success of contract introduction has not improved and the inability of exchanges to design contracts that are more likely to succeed has led to many questions about why futures contracts survive. This study focuses on contracts that are introduced when another contract with a similar underlying good exists. Why these duplicate contacts survive is analyzed based on strategic choices that exchanges can make such as contract design and environmental issues. This paper demonstrates that the likelihood of a successful competitive introduction (introduced contract succeeds, existing contract fails) is significantly altered in three situations. First, a successful introduction is more likely when the existing contract is traded on an open outcry trading system and the introduced contract offers a screen-based trading system. Second, it is more likely when the existing contract does not offer extended or off-hours trading but the introduced contract does. These two improvements are consistent with the introduced contract replacing the existing contract in the marketplace. Third, a success competitive introduction is less likely if the two contracts are in different major time zones. Alternatively, the likelihood of financial innovation (both the introduced and existing contract succeed) is more likely when an exchange introduces a contract that is related to the other contracts on that exchange. In addition, the likelihood of financial innovation increases when the existing contract is traded on a screen-based system and the introduced contract offers trading on an open outcry system. These two improvements are consistent with the introduced contract differentiating itself enough from the existing contract to survive.