Upstart ELX adding Morgan Stanley to its battle with CME

ELX Futures is preparing to sign Morgan Stanley to its list of big-name backers as the weeks-old competitor to CME Group Inc. looks to bolster its standing.

New York-based Morgan Stanley would join J. P. Morgan Chase & Co., Goldman Sachs Group Inc., Citadel Investment Group and nine other firms as an investor in the new electronic marketplace as soon as next month, three people with knowledge of the situation said. They declined to be identified because they aren’t authorized to speak before the agreement is finalized. Spokeswomen for Morgan Stanley and ELX declined to comment.

Terms of the deal and the amount of the investment could not be determined.

Adding a new partner — particularly Morgan Stanley, one of the few big Wall Street firms not already on board — is a coup for the New York-based startup, which has won about 2% of the market for U.S. Treasury futures since it opened July 10.

But to truly threaten CME — which dominates the Treasury futures market through its ownership of the Chicago Board of Trade, where the contracts got their start more than 30 years ago — ELX must expand its customer base to include money managers, said Richard Repetto, a New York-based analyst at Sandler O’Neill & Partners L.P. who covers exchanges and brokers.

CME raising fees on eve of rival's debut

CME Group Inc. has raised trading fees at its futures markets, just as a competitor exchange prepares to open its doors.

The fee changes, described in an 11-page notice on CME’s Web site, reduce prices on some products and raise them on others. Overall, the changes “will result in a minimal increase in revenues/overall rate per contract,” a CME spokesman said. The changes go into effect Aug. 1.

CME’s announcement just before rival ELX Futures L.P.’s planned late-June launch underscores its dominance in the futures-trading world and contrasts sharply with the strategy of a predecessor in dealing with a similar upstart just five years ago.

In 2004, the Chicago Board of Trade — bought by CME last year — cut fees on some products to zero, days before Eurex US was to begin offering trading in Treasury futures. Traders credit the move with preventing the exchange from gaining a foothold.

Since those days, CME has grown significantly, swallowing up not only the CBOT but also the New York Mercantile Exchange, whose fees, already higher than the average fees at CME and the CBOT, won’t change under the new fee schedule. CME’s three exchanges now handle more than 90% of U.S. futures trading.

ELX, based in New York and backed by Wall Street banks and a handful of Chicago trading firms, plans to offer Treasury futures at 9 cents per contract, below CME’s 11-cent average. Richard Repetto, a New York-based Sandler O’Neill analyst who has been following CME and the CBOT since their initial public offerings, said ELX still will face an uphill struggle competing with CME.

“There are other factors besides fees,” Mr. Repetto said, noting that ease of trading at CME might result in overall lower transaction costs.

“Assuming CME’s incumbent volume enables its traders to quote tighter markets, other traders might focus on best execution at a lower tick, rather than trading on an incrementally cheaper platform,” he wrote in a note to investors Tuesday.

CME's new fees will reduce costs for some high-volume Treasury futures traders, a strategy the exchange has used in the past to boost trading and liquidity. "Changes to our fees are reflective of the current market conditions and ongoing changes in our customer base," the CME spokesman said.

Christopher Allen, an analyst for Pali Capital, points out the changes will boost fees for floor-based traders. Overall, he said, they are "at worst, revenue neutral and at best mildly positive to revenue levels."

CME rival ELX set to launch, but bad blood could mar debut

(Crain’s) — CME Group Inc. rival ELX Futures L.P. got the regulatory green light to open an electronic exchange offering futures on U.S. Treasuries.

On board for the planned June launch will be ELX’s founders — including BCG Partners Inc., Citadel Investment Group, Citigroup Inc., Deutsche Bank A.G., Bank of America-Merrill Lynch, Barclays PLC, Credit Suisse Group, Getco, J. P. Morgan Chase & Co., Peak6, and Royal Bank of Scotland PLC — as well as a number of high-volume traders that ELX has signed on, executives say.

“We are confident that ELX Futures will be a strong and needed competitive alternative in the mainstream futures exchange marketplace that will benefit all market participants,” CEO Neal Wolkoff said in a statement Wednesday announcing approval by the Commodity Futures Trading Commission.

But bad blood between a Chicago software executive and one of ELX’s New York-based founders may keep some traders from accessing the new market.

Harris Brumfield, a former Treasury futures floor trader at the CME-owned Chicago Board of Trade, sued BCG Co-CEO Howard Lutnick several years ago over alleged patent infringement. Mr. Brumfield, who runs software firm Trading Technologies International Inc., claimed that Mr. Lutnick’s firm, known at the time as eSpeed Inc., illegally copied Mr. Brumfield’s software. The courts sided with Mr. Lutnick.

Now, Mr. Lutnick’s firm is the technology provider to ELX. And Mr. Brumfield — whose Web site claims that half of the volume at the world’s five biggest exchanges goes through Trading Technologies’ trading platform — has refused to connect to the fledgling exchange.

A Trading Technologies saleswoman in March acknowledged that Mr. Brumfield’s past run-in with Mr. Lutnick was hampering talks. This month she declined to comment. Mr. Wolkoff likewise declined to comment on the relationship.

Other ELX officials say that Trading Technologies doesn’t account for as much trading as it claims and that ELX’s start won’t be hampered by its refusal to sign on because other software providers are writing to the exchange.

Software dustups aside, it’s clear that ELX is up against great odds. At least three prior startups have tried and failed to wrest marketshare from the established Treasury futures market at the Chicago Board of Trade.

But the recent success dealers had in moving liquidity in a key part of the mortgage business, known as “to be announced bonds,” from a platform run by broker-dealer ICAP PLC to one controlled by the dealers themselves is being touted as a potential model for the new exchange.

ELX is expected to announce pricing for the new market in coming weeks.

CME rival ELX nears launch

ELX Liquidity Exchange, the startup that plans to challenge CME Group Inc.’s dominance in financial futures, is in final negotiations with Chicago-based Clearing Corp. for the critical job of guaranteeing its contracts, three people familiar with the talks say.

The impending clearinghouse agreement is the first concrete sign after months of silence that ELX, whose owners include Wall Street banks such as Citigroup Inc. and Chicago hedge fund Citadel Investment Group, is nearing a launch. ELX may officially announce the deal as early as next week, the sources say.

ELX is expected to take additional steps, including naming a CEO and filing an application with the Commodity Futures Trading Commission, the nation’s futures regulator, in the next few weeks, they say, adding that trading is expected to begin in the third or fourth quarter.

Essential to any futures exchange, a clearinghouse is responsible for settling trading accounts at the end of each day, financially backing trades and maintaining margin balances. ELX is choosing Clearing Corp. over three rivals that included Chicago-based Options Clearing Corp.

Now comes the hard part for ELX, formed in December with plans to offer futures based on U.S. Treasuries. To date, at least four exchanges have tried to take on CME or its recently acquired former rival, the Chicago Board of Trade, by offering identical, competing contracts. None have succeeded. CME currently accounts for more than 90% of U.S. futures trading.

Satish Nandapurkar, the former CEO of one-time CBOT rival Eurex US, gives the new venture “significantly less than a 50-50 chance” of competing in Treasury futures. In February 2004, Eurex US started Treasury futures trading but never managed to win much business, in part because the CBOT slashed its fees just before the new market’s launch.

ELX’s 12 owners — which also include Merrill Lynch & Co., three Chicago-based trading firms and electronic bond-broker BGC Partners Inc., formerly known as eSpeed Inc. — believe they’ll fare better than prior attempts.

“One important difference is we have an equity stake in the venture,” says Misha Malyshev, a managing director at Citadel and global head of its high-frequency trading desk. “We believe this is the right mix of players and they are incentivized to create a successful, long-term enterprise.”

Traders may also migrate to ELX because they watched the CBOT raise its fees once the threat from Eurex dissipated. “People realize there needs to be a legitimate and lasting competitive alternative,” says Faraz Javaid, Citadel’s director of new business development.

CME CEO Craig Donohue says he takes the potential competition “very seriously” and declines further comment. An ELX spokesman said no ELX directors were available to comment. A Clearing Corp. spokesman declines to comment.

ELX directors are in active talks with at least two CEO candidates and have chosen one of their own to be the market’s president; appointments will be announced in the next few weeks, two people involved with ELX said.

An agreement with ELX may provide a boost for Clearing Corp., which has about 40 employees at its 227 W. Monroe St. offices. Formerly known as Board of Trade Clearing Corp., its business has shrunk after the Board of Trade switched its clearing business to the CME, which runs its own clearinghouse. The CME bought the CBOT for $12 billion in July.

Read more at http://www.chicagobusiness.com/cgi-bin/news.pl?id=29367