The future exchanges of the world have a long history as a forum for intermediation and price risk transfer. Buyers and sellers didn't have the time, talent or resources to negotiate with the myriad of counter parties to secure supply and get the best price. Hence the emergence of commodity bazaars and later of futures exchanges which guaranteed the financial integrity of all counterparties.

In light of this competition from different transaction platforms, the TFE (Toronto Futures Exchange) decided to launch an automated electronic trading system to transact equity index futures. Their hope was to present customers with a more transparent and accessible contract which would encourage further customer participation.

The local floor trading community, which had been providing much of the liquidity, saw this as a potential threat to their investment. Their apprehension was not unreasonable. U.S. futures exchanges which are dominated by floor trading locals have been slow to embrace electronic trading, as it gives the customer every advantage previously enjoyed by traders on the floor.

Traditional exchanges have also been forced to compete with private exchanges launched by private firms such as Cantor Fitzgerald. Their launch of a U.S. Treasury Bond Futures contract, in direct competition to CBOT's flagship bond contract, has met with surprising success. A bigger threat is the Internet. It can permit virtual exchanges to develop anywhere good ideas meet sound financial backing.

The potential for these newer platforms to usurp the power of the traditional exchanges, and provide more flexible, less costly intermediation, may be the opportunity of the next century. David Rudd is senior vice-president, institutional trading, Refco Futures (Canada) Ltd., in Toronto.