CBOE Global Markets said on Monday it would begin trading its bitcoin futures contracts, known as XBT futures, next Monday, and will offer free trading for the rest of the month to help draw in traders and create a market. Both the CBOE and its crosstown rival, CME Group, received permission last week from the CFTC to launch bitcoin derivatives as they go head-to-head in a battle to determine which exchange will come to dominate the market for bitcoin-linked derivatives, the Financial Times reported. CME Group, the world's largest derivatives exchange, won't launch its set of bitcoin derivatives until the following Monday.
Both exchanges are hoping that rising interest in the controversial cryptocurrency from Wall Street traders will in turn help drive demand for its new derivative products. A flood of interest has gripped the digital currency community as Bitcoin's value has ballooned this year, at one point climbing 1,100%: Early on Monday, the digital currency rose to an all-time high just shy of $12,000 a coin - nearly six times its level from early April.
Many institutional investors have been eager to trade bitcoin, but are waiting for a more widely recognized, regulated market. Shares in both CME and CBOE have risen 9% since the end of October as they have firmed up their plans.
Ed Tilly, chief executive of CBOE, said there is “unprecedented” interest in bitcoin.
“We are committed to encouraging fairness and liquidity in the bitcoin market," he said.
CME and CBOE are competing to dominate the market for bitcoin derivatives by offering different products. They also have different systems for pricing their products. CME is relying on a daily reference rate based on data from a aful of constituent exchanges. The rate is set daily at 4 pm ET Londont Time. CBOE's contracts are based on a daily auction price from Gemini, the virtual currency exchange run by twins Cameron and Tyler Winklevoss. Investors may not own or control more than a net 5,000 contracts, long or short combined, and the market will only be open for less than six hours per day.
Both exchanges are insisting that deals will be settled in cash the day after contracts expire.
Some investors, particularly electronic market makers, have expressed an interest in the products. But they've also made their reservations public.
According to the Financial Times, DRW of Chicago, one of the world’s largest proprietary trading companies, has a subsidiary named Cumberland for buying and selling bitcoin.
“Although DRW and Cumberland haven’t been directly involved in the design of these contracts, our recommendation to any exchange that has asked is to list a physically-delivered bitcoin futures contract,” a spokesperson for DRW and Cumberland said.
“Products indexed to a spot exchange or related auction will be inherently flawed due to the constraints that currently exist on these spot exchanges."
The market’s main regulator, the Commodity Futures Trading Commission, has had concerns that futures correlated to the highly volatile bitcoin price could create instability in clearing houses, the market buffers that act as counterparties to a trade and prevent any defaults from infecting the rest of the market. Though that didn't stop the CFTC from granting its blessing to the two exchanges. CME will demand from investors an initial margin of 35% to back the trades in its clearing house, while traders using Cboe will need to pay 33% of the trade price upfront.
In a speech in London last week Brian Quintenz, the CFTC Commissioner, said the agency had the powers to raise the margin levels if it felt the amount held by a clearing house was inadequate.
“It is incumbent on market participants to conduct appropriate due diligence to determine whether these products, which have at times exhibited extreme volatility, are appropriate for them,” he noted. Now that the exchanges are offering bitcoin-related products, popular brokerages must now make a difficult choice: Will they offer futures contracts tied to bitcoin to clients to meet popular demand even though many in the financial services industry believe the digital currency has created a massive bubble.
TD Ameritrade Holding Corp. and Ally Financial Inc.’s Ally Invest said they will offer the derivative products to customers once they become available, according to Bloomberg. Fidelity said it currently has no plans to offer the bitcoin futures - which is ironic, since the company's CEO allowed customers to link their Coinbase accounts to their Fidelity dashboards. Other major firms declined to comment.
Some market strategists believe the launch of derivatives products will help introduce a higher degree of "two-way volatility" into the bitcoin market.
“What’s exciting to us about it is it provides a two-sided market,” JJ Kinahan, chief market strategist at Omaha, Nebraska-based TD Ameritrade, said in an interview last month.
“With natural buyers and sellers, that helps to put a more reasonable volatility on the product.”
Brokerages say they plan to offer the bitcoin futures and options because of popular demand.
“Ally Invest customers have specifically expressed interest in the futures product the Chicago Mercantile Exchange is planning to launch that is based on bitcoin,” Rich Hagen, the brokerage’s president, said in an emailed statement Nov. 28. “If the CME does launch this product, Ally Invest plans to offer it to current and new futures customers immediately.”
According to Bloomberg, Bank of America Corp.’s Merrill Lynch and Morgan Stanley declined to comment on whether they will offer bitcoin futures, as did Charles Schwab Corp. and E-Trade Financial Corp.