By Jacob Bunge
A push by big Wall Street banks to challenge the dominance of
CME Group Inc. (CME) in handling financial futures is struggling as
business on their trading platform has slowed to a trickle.
The ELX Futures LP platform, launched in 2009 by a consortium of
banks and trading firms, has seen its share collapse this year in
trading of interest-rate futures and options--bets on the direction
of central bank policy that are among the most-commonly used risk
management tool for companies, fund managers and speculators.
Chicago-based CME has long dominated the rate-futures market,
which is the largest listed U.S. futures market by volume. But
recently it became a three-way battle--a rarity in derivatives
trading where an incumbent's existing volume acts as a tough
barrier to entry.
In addition to ELX, NYSE Euronext has pushed into the market
with its own U.S. futures venture, but it also has struggled to
maintain momentum as key rates remain stuck at historically low
levels.
Antitrust regulators approved the 2007 creation of CME from the
merger of the Chicago Mercantile Exchange and the Chicago Board of
Trade on the basis that new entrants would emerge, just as
IntercontinentalExchange Inc. (ICE) has split the market in energy
derivatives market and some other commodities.
ELX claimed 4% of the market in 10-year Treasury futures at the
platform's peak in 2009, according to Raymond James Financial
(RJF). Last month, total trading amounted to about 3,900 contracts,
down 99.6% from a year earlier, according to estimates from Sandler
O'Neill + Partners. It's only traded about 1,600 contracts so far
this month.
NYSE Euronext started its U.S. futures business with metals
contracts acquired from CME as part of the deal to secure approval
from antitrust officials to acquire its cross-town rival.
The NYSE venture expanded into rate futures in 2011. Overall
trading on the platform is up 1% so far this year due to growth in
equity-linked futures, but its average 78,600 contracts traded per
day over the first nine months of 2012 remains far behind CME's
business.
Duncan Niederauer, chief executive of NYSE Euronext, said in
June that the second half of 2012 would be a "make or break" period
for the platform. A spokesman for NYSE Euronext declined
comment.
The ELX and NYSE exchanges have faced the same problem that
tripped up prior challengers: the challenge of luring away
investors accustomed to existing, liquid markets where they can be
assured of speed and efficiency when placing trades.
In 2011, the consortium backing ELX tried to strike a deal that
would merge the market with NYSE's U.S. futures platform, but was
rebuffed, according to people with knowledge of the discussions.
Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc.
(ICE) were approached as well, but a deal failed to materialize,
one of these people said. Representatives for Nasdaq OMX and ICE
declined comment.
Last January ELX Chief Executive Neal Wolkoff, who had led ELX
since its launch, departed and was replaced by Richard Jaycobs, who
previously headed the Cantor Exchange. In March the interdealer
broker BGC Partners Inc. (BGCP), a key backer of ELX that supplies
its technology, invested $16 million in the exchange, boosting
BGC's voting interest in ELX to 49% from 26.3% and giving the
brokerage operational control, according to regulatory filings.
Bank investors Goldman Sachs Group Inc. (GS), JPMorgan Chase
& Co. (JPM) and Credit Suisse AG (CS) exited the ELX
consortium, according to persons familiar with the matter.
Around the same time, the consortium of banks and trading firms
backing the NYSE U.S. futures effort increased their stake in that
market to 49% from 42%, according to people close to the exchange
group.
Howard Lutnick, chief executive of BGC Partners, told analysts
in August said that ELX remained an "excellent asset" as regulators
prepare to roll out new rules governing derivatives markets. People
with knowledge of ELX's strategy said that the exchange is working
on new services that could capture business related to the
much-larger market for derivatives traded off-exchange, which faces
new regulations under the Dodd-Frank financial law.
"[H]aving a fully improved futures exchange deeply connected
with BGC will be a great opportunity for our clients to transact
business in various ways," Mr. Lutnick said on a conference call.
ELX is "maybe not a great asset for today, but an extraordinary
asset for tomorrow," he said.
Write to Jacob Bunge at jacob.bunge@dowjones.com
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