Imagine a global market exchange that would allow investors to trade stocks, ETFs, futures and options all at one place. The CBOE Stock Exchange, known as the CBSX, will open for trading starting on Monday, March 5, 2007. CBSX is a subsidiary of the Chicago Board Options Exchange and more information on this event can be found at the CBOE website. This development increases the competition within the US exchange community; however, we have also seen similar growth in the Europe, East Asia and even in the Middle East. In the case of CBSX, the continued trend favoring electronic trading is clear: Trades will be implemented through CBOE’s electronic platform, CBOEdirect, which also facilitates trading for the options exchange as well as the Futures Exchange.

We’ll see how this new exchange will go up against Globex which handles about 70 percent of the Chicago Mercantile Exchange’s (CME) total exchange volume. The Merc announced its plans to purchase the Chicago Board of Trade a few months back for roughly for $8 billion in stock, rejoining the two financial institutions as CME Group, Inc. According to the Merc’s site the “CME continues to expect the transaction to close by mid-year 2007.” One result of this transaction would be the CBOT’s electronic trading brought onto Globex.

The CBOE’s move with their new CBSX platform is its attempt to deal with its neighbor who happens to be the 800-pound gorilla. And rightly so. The business of trading beta (ETFs and derivatives) is sure to grow. Everyone from institutional investors who have internally managed asset allocation programs to hedge funds to Joe Average are fueling growth in this area.

But what we still haven’t seen is the mass stampede of global M&A activity within the exchange community. It has certainly started but I’m guessing that we’ll see some very large acquisitions that will create global trading behemoths.

I’m not sure what the catalyst will be though. The regulators can’t force the situation but I’m guessing they would like less exchanges to keep track of and build relationships with. Perhaps it will simply be market driven should this four year bull market drive on beyond the recent bumpiness. At some point in time, people plugged into the market (shareholder of an exchange would count) will want to sell out.

What’s my point? Bottom line is the world of trading beta will get cheaper even if we see consolidation in the global exchange community. The advances in technology are progressing exponentially and thank goodness when you consider the in-step increased trading volumes. Much older and more widely discussed than the recent “anti-ETF” rhetoric, the arguments made against derivatives will certainly increase as the derivatives market continue to expand and like ETFs, in an exponential manner.>

I won’t get into the debate of whether the derivatives market is the ticking time bomb and potential weapon of mass destruction. To me, it’s just another tool like a stock or ETF. If there are concerns, they’re probably regarding leverage. Why not just pear it down?

It’s like the incredible amount of repetitive news regarding the subprime mortgage market. Every 4 year old who is learning the lessons of money knows the deal. You want to lend money to someone who doesn’t really qualify for borrowing, there’s a decent chance they’re not going to pay you. Should there be any surprise if the subprime mortgage market blows up? Come on.

Shouldn’t the same apply to the derivatives market? LTCM, Barings and Amaranth all deal with the use of leverage. Forget about rogue traders for now. If you have the exchange dealing with counterparty risk, there’s got to be a relatively easy mechanism to control the amount of leverage allowed based on the investor and what type of trading they’re involved with. I hate to say it but maybe it’ll take the regulators to step in and strongarm the situation. Maybe after one or two more Amaranths the industry will figure it’s time to strongarm themselves.

Despite all this, I’m still pretty happy as I think we’re moving closer to a world where trading beta, no matter what the asset class or instrument, in a rather effortless manner from virtually anywhere, can be achieved … with both a highly acceptable level of execution and cost.

We focus so much on ETFs in our own jurisdiction but there are many interesting instruments worth considering outside home. Currency risk aside (not in reality of course, just for the purposes of this discussion), these are the areas investors should consider when implementing their portfolio decisions. Diversification isn’t the perfect answer — aside from cash and certain bonds how have most asset classes done during the declines of this past week or this past summer? — but it’s one of many steps in protecting your portfolio.>

I’m hoping that I can trade a global list of ETFs and derivatives domiciled anywhere from my screen. It can be done now. But it can be done more elegantly in the near future. That’s not to much to ask for.