John Lothian's Industry Newsletter

John Lothian's Daily Futures & Securities Industry Newsletter

October 16, 2002

Lead Stories

CBOT Names Robert Ray as Vice President

http://www.cbot.com/cbot/www/cont_detail/0,1493,10+24+109+9360,00.html

SEC Plans Hearings on Stock Markets
http://story.news.yahoo.com/news?tmpl=story&u=/ap/20021016/ap_on_bi_ge/sec_market_hearings_2

SEC Proposes Internal Control Reports (Reuters)
...At its open meeting Wednesday, the SEC was also expected to back three other rule proposals implementing portions of the Sarbanes-...
http://story.news.yahoo.com/news?tmpl=story&u=/nm/20021016/bs_nm/financial_sec_rules_dc_1

SEC May Lose Big Bucks Promised By Congress - Fund Action - 10/16/02
It is increasingly possible that Congress, which is split on budget priorities, will leave town for the year without appropriating for the Securities and Exchange Commission the lavish increase in spending lawmakers were promising last summer.
http://www.institutionalinvestoronline.com/iiochannel/banking/20021015000600.htm

Dynegy Ends Energy Trading Business (AP)
Dynegy Inc. announced Wednesday that its chief operating officer is resigning, the company is dumping its struggling trading business and significant layoffs are coming.
http://story.news.yahoo.com/news?tmpl=story&u=/ap/20021016/ap_on_bi_ge/dynegy_12

Morgan Stanley and Lehman Brothers subpoenaed
http://biz.yahoo.com/ft/021016/1033849032442_1.html

ISE Introduces Redesigned Web Site
http://www.iseoptions.com/about/press/pdf/press_releases/2002/ISE_Introduces_Redesigned_Web_Site$20021015.pdf

NYBOT Begins Building Global Electronic System for Coffee/Cocoa Deliveries
http://www.nybot.com/pressRelease.asp?releaseID=485

TSX Group CEO Calls for "One Voice" On National Regulatory Issue
http://www.tse.com/en/mediaNews/newsreleases/news3298.html

Exchange News

Sign up for the Master Classes on Futures and Options at Investors Chronicle Investment Summit
http://www.icsummit.com/

Pacific Exchange To Trade Six New Options
http://www.pacificex.com/news/press/press-2002/press_02_six_more_new.html

Winnipeg Commodity Exchange Inc. Delists Field Pea Futures Contract
http://www.wce.ca/wnew/newsreleases/2002/pr-10-16-02.asp

PHLX to Begin Trading Options on JetBlue Airways Corp.
http://www.phlx.com/news/pr2002/02pr1015.html

Exchange submits planning application for Old Broad Street site
http://www.londonstockexchange.com/newsroom/releases/16-10-02.asp

Frankfurt Stock Exchange Council Approves New Segmentation for Equity
http://www.exchange-handbook.co.uk/news_story.cfm?id=39936

Oslo Børs Enters Into A New Contract To Sell Market Surveillance Functionality
http://www.exchange-handbook.co.uk/news_story.cfm?id=39932

New Zealand Stock Exchange Announces Successful Demutualisation Vote
http://www.exchange-handbook.co.uk/news_story.cfm?id=39931

Regulatory News

Added Comment Letter Re: Denomination of Customer Funds and Location of Depositories; 67 Fed. Reg. 52641 (August 13, 2002)
http://www.nfa.futures.org/news/commentLetters/cl09-19-2002.html

NASD Charges Two Minneapolis Brokers with Insider Trading; Settles with Three Others
http://www.nasdr.com/news/pr2002/release_02_052.html

Gerald Laporte Selected as Chief of the Office of Small Business Policy, Division of Corporation Finance
http://www.sec.gov/news/press/2002-149.htm

Commission Sets Dates for Market Structure Hearings
http://www.sec.gov/news/press/2002-148.htm

The SEC News Digest

COMMISSION SETS DATES FOR MARKET STRUCTURE HEARINGS
The Securities and Exchange Commission will hold hearings this fall to discuss key issues relating to the structure of the U.S. equity securities markets. The Commission has initially scheduled two full-day hearings, the first to be held on Tuesday, Oct. 29, 2002, at the Commission's headquarters in Washington, D.C., and the second, on Tuesday, Nov. 12, 2002, at the NYU Stern School of Business in Schimmel Auditorium, Tisch Hall, in New York City.

The   hearings will address a variety of topics, including:   the collection, consolidation and dissemination of market data through intermarket   plans;   broker-dealers' duty of best   execution   and corresponding marketplace rules relating to intermarket access, trade- throughs,   and price protection; the role of national securities exchanges, electronic communications networks (ECNs), and alternative trading systems; and the self-regulatory system.

The Commission has invited a distinguished panel of market experts and professionals to participate in each hearing, representing the views of investors, market centers, investment firms, and the academic community. Each hearing will cover the same topics but with a different set of participants. The Commission and Commission staff will also participate in each hearing. Hearings will be open to the public and will be web- cast.

The   panelists   will include:   John Markese, President,   American Association of Individual Investors; Tom Gardner, Founder, The Motley Fool; Joel Seligman, Dean, Washington University School of Law; Maureen O'Hara, Professor of Management and Finance, Cornell University; Albert Kyle, Professor of Finance, Duke University; Ruben Lee, Oxford Financial Group, London; Richard Ketchum, President, The Nasdaq Stock Market; senior management of the New York Stock Exchange; Salvatore Sodano, Chairman and CEO, American Stock Exchange; Paul O'Kelly, President and CEO, Chicago Stock Exchange; Gary Gastineau, ETF Advisors, Rosenkranz & Co.; Tom Peterffy, Chairman, TimberHill; David Pottruck, President and Co-CEO, Schwab Capital Markets; Bernard L. Madoff, Principal, Bernard L. Madoff Investment Securities; Robert Steel, Vice Chairman, Goldman Sachs; Robert Murphy, NYSE Specialist, LaBranche & Co.; Matthew DeSalvo,
Nasdaq Market Maker, Morgan Stanley; Ian Domowitz, Managing Director, Investment Technology Group; David Whitcomb, President   and   CEO, Automated Trading Desk; Ed Nicoll, CEO, Instinet Corporation; Gerald Putnam,   CEO, Archipelago Holdings; George "Gus" Sauter, Managing Director, The Vanguard Group; Minder Cheng, Global Head of Equity and Currency Trading, Barclays Global Investors; Wayne Wagner, Chairman, Plexus Group; and Matt Gelber, Vice President, Fidelity Investments.

Additional information, including a more detailed list of topics for discussion, will be made available prior to the hearings through the SEC's Web site at: www.sec.gov. Copies of materials submitted by the participants will be available by contacting the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549 or by accessing the SEC's Web site at: www.sec.gov.   (Press Rel. 2002-148)
http://www.sec.gov/news/digest/10-15.txt

Ontario Securities Commission approves settlement between staff and Foundation Equity Corporation
http://www.newswire.ca/releases/October2002/16/c1459.html

Reports

Bond Talk Today's Events
http://www.bondtalk.com/global.cfm?S=todaysevents

USDA Today
http://www.usda.gov/nass/PUBS/TODAYRPT/TODAY.HTM

Miscellaneous News

Rolfe & Nolan Completes Major Eurex Phase of Commerzbank Implementation
London, October 16th 2002 - Rolfe & Nolan has finalised the second phase of Commerzbank's RANsys implementation. The system now handles all of the bank's Euronext.liffe and Eurex business. The remaining portion of Commerzbank's international business will be transferred during the final phase. RANsys replaces a previous installation from another supplier.

Commerzbank is a major player on Eurex and other international markets. RANsys was selected because of its robust, proven architecture, which easily handles high trading volumes. Rolfe & Nolan's stability and reputation in the marketplace was also an important consideration.

Bart Snick, project manager at Commerzbank commented: 'The Rolfe & Nolan EUREX implementation, completed within a 9 month timeframe, brings the bank significant cost reductions, streamlines the IT platform and allows for back-office rationalisation.'

Bob Freeman, Rolfe & Nolan's CEO said: 'The finalisation of the major second phase of this installation at such a prestigious client is a significant milestone, which underlines the strength and versatility of our system. We are delighted to have successfully met Commerzbank's expectations and targets.'

Instinet Posts Third Consecutive Loss
http://story.news.yahoo.com/news?tmpl=story&u=/nm/20021015/bs_nm/financial_instinet_earns_dc_3

S&P Launches US Corporate Governance Services And Publishes Transparency And Governance Study
http://www.riskcenter.com/cgi-bin/article.pl?id=5616

Knight Trading Group Directors Elect CEO and President Thomas M. Joyce To Board (PR Newswire)
Knight Trading Group, Inc. today announced that its Board of Directors unanimously elected Knight Chief Executive Officer and President Thomas M. Joyce to the Board in its regular meeting on October 15, 2002.
http://biz.yahoo.com/prnews/021016/nyw042_1.html

Knight Trading Group Reports Loss of $0.03 Per Share (PR Newswire)
Knight Trading Group, Inc. today reported a net loss of $3.4 million for the third quarter of 2002, or $0.03 loss per share.
http://biz.yahoo.com/prnews/021016/nyw009_1.html

Waksal Admits Guilt in Insider Trading Scheme (Reuters)
Samuel Waksal, the former chief executive of ImClone Systems Inc., entered a partial guilty plea to insider trading charges on Tuesday and a prosecutor warned a broader case against Waksal and those he may have tipped could be brewing.
http://story.news.yahoo.com/news?tmpl=story&u=/nm/20021015/bs_nm/crime_waksal_dc_18

Merrill Lynch Reports Third Quarter Net Earnings of $693 Million (Business Wire)
... the debt markets business had particularly strong results in the trading of interest rate products - especially derivatives and U.S. governments....... in growth opportunities which leverage its existing franchise, such as building its foreign exchange and securities services businesses, expanding its derivatives capabilities,...... actions and initiatives by current and potential competitors, the effect of current and future legislation or regulation, and certain other additional factors described in Merrill Lynch's...
http://biz.yahoo.com/bw/021016/162135_1.html

Cost-Cutting Helped Boost Merrill's 3rd-Quarter Profit 64% (Dow Jones)
NEW YORK -- NEW YORK -- Merrill Lynch & Co. posted higher quarterly earnings Wednesday despite the steep decline in stock prices during the quarter, as the largest U.S. brokerage firm continued to hack away at costs.
http://story.news.yahoo.com/news?tmpl=story&u=/dowjones/20021016/bs_dowjones/200210160953000540

Exodus shareholders file lawsuit against Merrill, analyst Blodget (AP)
Merrill Lynch & Co. Inc. and its former Internet analyst, Henry Blodget, have been sued in a class-action lawsuit on behalf of Exodus Communications Inc. shareholders.
http://story.news.yahoo.com/news?tmpl=story&u=/ap/20021015/ap_wo_en_bu/us_merrill_lynch_lawsuit_1

The Bank of New York Company, Inc. Reports Third Quarter E.P.S. of 11 Cents (Business Wire)
...Revenues from foreign exchange and other trading activities were $49 million in the third quarter of 2002 compared with $72......Future cash advances will largely relate to the sublease loss and business interruption costs....
http://biz.yahoo.com/bw/021016/162129_1.html

Get Paid to Wait (SmartMoney.com)
... people who like cashing dividend checks, there's an unusual preferred stock that lets you exchange some of tomorrow's potential profit for a higher yield today.......But based on current prices of energy futures, he thinks Cross Timbers, Hugoton and San Juan are trading today at an average 25% discount...
http://biz.yahoo.com/smart/021015/20021015screensturscre_8.html

How To Buck The System And Raise $100Million By Doing It?
John Muresianu, the Fidelity Fifty Fund manager who quit in June after being told he held too much cash, has raised more than $100 million for his own equity hedge fund.
http://www.garp.com//newsfeed.asp?Category=6&MyFile=2002-10-16-5611.html

Merrill Lynch’s Gold Fund Triples In Size, What`s In Store Next?
Merrill Lynch Gold & General Fund, which invests in companies that mine the precious metal, has almost tripled in size since the start of the year as investors pile into the UK 's best performing stock fund in 2002.
http://www.garp.com//newsfeed.asp?Category=6&MyFile=2002-10-16-5613.html

Man Group Shares Downgraded by HSBC on Bond Market Concern
Man Group Plc was downgraded by Robert Mumby, an analyst at HSBC Holdings Plc in London, on concern a decline in bond prices may hurt the performance of the U.K. asset manager's most popular hedge funds.
http://quote.bloomberg.com/fgcgi.cgi?T=quote/uk/uk_quote_long_news.ht&s=APa1tWhQ1TWFuIEdy

Table of U.K. Chief Executives' Pay for 2001: Graef Crystal
The following table lists the results of a study of chief executive officers' pay at 85 current and former companies in the U.K.'s FTSE 100 stock index. Definitions for each column are provided below
http://quote.bloomberg.com/fgcgi.cgi?T=quote/uk/uk_quote_long_news.ht&s=APaygSBM5VGFibGUg

Lehman Creates New Middle-Market Hedge Fund Unit - Private Asset Management -10/16/02
Lehman Brothers has created a new middle-market unit to work with hedge funds.
http://www.institutionalinvestoronline.com/iiochannel/banking/20021015000700.htm

John's Comments

Correction: I erred yesterday. NASD has issued their fees for security futures. http://www.nasd.com/trading_fee.asp. I have fined myself for this error.

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The John W. Henry & Company, Inc. web site -- www.jwh.com -- has been updated with detailed composite performance information on our various investment

portfolios through the month of September 2002.

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Hot Cars and Hot Futures Contracts

There is a phenomena in the auto sales business where car salesman will move from dealership to dealership from one year to the next depending on which company has the hottest selling models. If Chrysler has a hot lineup of cars, and General Motors has a bunch of clunkers, then some of the GM salesman will start moving over to Chrysler dealerships.

Salesman want to sell what is hot. That is how they get paid, by making sales. The hotter the item is selling, the easier it is to sell it. Some cars will practically sell themselves. When PT cruisers came out, they were selling above the sticker price, demand was so high.

The flip side of this is that there are a whole lot of car dealerships with the slower selling models that are understaffed because the salespeople moved. The salespeople remaining may make up for the slower pace of sales by having fewer salesman around to compete with. But overall sales are still down.

It has been a while since the futures markets have had a hot new model, or series of models hit the marketplace. The introduction of the emini S&P and the Dow Jones futures back in 1997 would qualify, though it was the emini S&P that has been the hot model.

In some ways the futures industry is poised at a spot where we are going to see the introduction of numerous hot new contracts/models. These contracts have all the hot features of the hot selling contracts, including electronic matching, dedicated liquidity, high volatility price movement, streaming prices, depth of market, easy to use online trading interfaces and instantaneous fills. They even have some unique features, like Exchange For Physicals, that I believe will set them apart from the competition. Speed, transparency, surety, liquidity and innovation at its best.

How will the older, slower, less universally transparent markets, with good but under-developed liquidity, compete with all these hot new models? How will an IBM single stock futures trader react to an opportunity in soybeans, when they have another opportunity in Exxon single stock futures? Wait for a fill in soybeans, or know instantly that you are filled in Exxon? Increase the frequency of your trading in an active SSF market with lots of volatility and price movement, or trade something where an increase in volatility leads to an dramatic decrease in order flow efficiency, surety and fill response times?

So not only will the futures market have hot new models/contracts to sell, but it will also have the largest increase in potential users of its markets. That is a combination that would make any salesman's heart go pitter patter.

Those salesman will be moving to sell these hot new products. New salesman from other dealerships (exchange based brokers) will move over to sell these hot new models. New salesman from other related industries (Securities) will be moving over to sell these hot new products.

The key word is "new." Even though these companies have been around and actively traded, they are new as futures contracts. From a marketing standpoint "new" sells. In fact, "new and improved" sells really well, especially when it is true. A brokerage firm can only run advertisements with seasonal information on the grains so many times before it becomes stale. But hey, a new product, just like many people already know and trade with some really customer friendly features, that is interesting.

The features that these new products embody, will become more important to a larger group of traders. These traders will demand and are demanding these features in other markets they trade. The popularity of the emini S&P contract speaks to this, as well as the growing popularity of the emini Dow Jones contract, among others. Traders will increasingly ignore markets where those features are not present. Not because there is not opportunity in some of these clunkier markets, but because there are so many other alternatives competing for their attention and trading skills.

I wrote quite a bit about a product at the CBOT called the X-Funds. A short term portfolio with an intended upward bias that settled and reconfigured every two weeks. That product was to complicated for most industry professionals to understand, let alone the trading public. However, the best of what that product offered is imbedded into the new Narrow Based Indices that are to be launched by OneChicago.

Do you want to buy the basket and arb out the components, like an X-Fund was intended to do? Yes, well you can do that with a Narrow based indices. Do you want an investment in a specific equity sector, but one with futures margins, marked to the market cash, and a cheap and efficient mechanism to get in and out? Well, then trade a Narrow Based Indices.

There are so many possibilities with the new products coming to the futures industry, that I believe some existing markets that don't offer the same access and responsiveness will see interest in those markets decrease on an outright basis. Security futures in particular will offer traders and un-before side by side view of the underlying cash market and the futures. There will simply be too much advertising, education, and focus on these new products for lesser accessible and responsive markets to compete effectively. These contracts will be increasingly marginalized.

I don't believe members of the existing exchanges see this, even some at the exchanges ones behind the launch of this new product.

I am not trying to make out Single Stock Futures to be the second coming of futures contracts. But I truly believe that this product will be very successful and transform the futures industry. I believe it will have a profound effect on traders and their expectations about what a market is. Part of this is based on a crowding out theory. Part of this is based upon the intransigence of the extreme supporters of the open outcry markets. Part of this is based upon my expectations of growth that far exceed anything the futures industry has ever seen. Part of this is based upon expectations of unexpected competition. Part of this is based upon the potential impact of destructive technologies. And part of this is based upon the value straight through processing of Security Futures offer risk adverse organizations in these times of international conflict and terror. Why wait 3 days to clear an equity trade, when you can clear a Security Futures trade just like that?

There are hot new models on the showroom floor. You can still buy the older model lines, but you have to walk to the end of the dealer lot to see them. The hot models are being pitched in full page picture advertisements in the newspaper. The older models are listed in the small print at the bottom. Which models do you expect to sell more units?

Regards,

John J. Lothian

The Price Futures Group, Inc.

Electronic Trading Division

Chicago Board of Trade Building

141 West Jackson Boulevard, Suite 1340A

Chicago, IL 60604

Phone: 1-800-713-0215 or 312-648-2426

Fax: 312-902-6437

Web site: www.pricegroupetd.com

E-Mail: JLothian@pricegroup.com

Disclaimer: This letter is strictly the opinion of its writer, and not necessarily those of The Price Group and its management, and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Security futures are not suitable for all customers.

Futures and options trading involves risk. Past results are no indication of future performance.