Bakkt potentially represents a double-barrel threat to CME. Not only is it competing in futures, if it attracts a substantial amount of spot trading activity (due to a superior trading, clearing, settlement and custodial...
platform, repetitional capital, and regulatory safeguards) this may undermine the reliability of CME’s cash settlement mechanism by attracting volume faraway from the markets CME uses to work out final settlement prices. this might make these market prices less reliable, and more subject to manipulation.
Indeed, some–and maybe all–of these exchanges could disappear if ICE’s cash market dominates. CME would be up a creek then.
That said, one among the teachings of inter-exchange competition is that the simplest mousetrap doesn’t always win. especially , CME has already established liquidity within the futures exchange , and as whilst formidable competitor as Eurex acknowledged in Treasuries within the early-oughties, it's difficult to induce a shift of liquidity to a competitor.
There are differences between crypto and other more traditional financial products (cash and derivatives) which will make that liquidity-based first mover advantage less decisive. For one thing, as I noted earlier, heretofore cash crypto has proved an exception to the winner-takes-all rule. Maybe an equivalent will hold true for crypto futures: since I don’t understand why cash has been an exception to the rule, I’d be reluctant to mention that futures won’t be (although CBOE’s exit suggests it might). for an additional , the complementarity between cash and futures during this case (which ICE is cleverly exploiting in its LME-like contract structure) could prove decisive.
If ICE can get traction within the fragmented cash market, that might bode well for its prospects in futures.
Entry into a derivatives or cash market in competition with an incumbent is usually a highly leveraged bet. Odds are that you simply fail, but if you win it can prove enormously lucrative. That’s essentially the bet that ICE is taking in BTC.
The ICE/Bakkt initiative will convince be a desirable case study in inter-exchange competition.
Crypto is sufficiently distinctive, and therefore the double-barrel ICE initiative sufficiently innovative, that the normal betting form (go with the incumbent) could well fail. i will be able to watch with interest
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