ELX edges into CME's home turf
Ann Saphir
Wall Street-backed startup ELX Futures L.P. is winning over Chicago futures traders, giving it a toehold in rival CME Group Inc.'s backyard.
Launched in July, ELX handled 2.8% of trading in Treasury futures last month. CME still controls the rest of the market, but ELX offers something the world's largest operator of futures exchanges doesn't: simultaneous trading in futures contracts and the underlying government bonds.
"It's got legs," says Ray Cahnman, chairman of Chicago-based Transmarket Group, where several traders are using ELX.
If ELX can expand its beachhead — something that several previous CME challengers have failed to do — it would pose a significant threat to CME even as the larger exchange reaches what analysts say is a recovery in trading volume after a dismal year. CME is taking the threat seriously enough to warn customers that it won't accept transfers of trading positions from ELX.
Observers are looking for signs that ELX can broaden its customer base beyond its founders, which include New York banks J. P. Morgan Chase & Co. and Goldman Sachs Group Inc. and Chicago-based hedge fund Citadel Investment Group.
It appears to be doing so. ELX is winning new business from MF Global, confirms a spokeswoman for the large broker with a strong Chicago presence.
Breakwater Trading LLC managing partner Tom Rubio, who also is ELX's chairman, says his Chicago-based firm's trading on ELX is rising but accounts for a declining percentage of the exchange's business. That's a sign, he says, that new users are coming on board.
"I'm definitely looking at Chicago as a source of tremendous opportunity and trading talent for ELX," says its CEO, Neal Wolkoff. Chicago traders "are a powerful source of volume."
Other trading firms are holding back, seeing little upside and a lot of hassle in setting up new clearing accounts with ELX. "I'd like to look at it, but I haven't gotten around to it," says Michael Creadon, who runs Chicago trading firm Traditum Group LLC. That reaction has some analysts discounting ELX's potential.
"There just aren't any indications they are making significant inroads into CME's business," says Patrick O'Shaughnessy, a Chicago-based analyst at Raymond James & Associates Inc. Treasury futures trading on the CME has increased since ELX opened, as investors look to protect their holdings in government debt and bet on potential increases in interest rates.
'I'm definitely looking at Chicago as a source of . . . opportunity and trading talent for ELX.'
— Neal Wolkoff, CEO,
ELX Futures L.P.
CME is "the best marketplace for customers to manage their Treasury risk exposure," says a CME spokesman, citing the exchange's liquidity.
"They have done better than I thought they would," says Mark Lane, an analyst at Chicago-based William Blair & Co., of ELX. Still, he sees "big challenges," including CME's overwhelming market dominance. Open interest at CME — the number of contracts that have yet to be closed out — stands at 3.8 million contracts, dwarfing ELX's 15,400.
ELX tried to allay traders' liquidity fears by creating a mechanism to easily transfer contracts from ELX's clearinghouse to CME's, and vice versa. The Commodity Futures Trading Commission approved the mechanism on Oct. 14, but CME responded with an Oct. 19 missive notifying customers that it wouldn't allow transfers under the new rule.
ELX asked the CFTC to intervene, accusing CME of using its market dominance to "chill" competition. The agency has yet to weigh in.
Despite the regulatory uncertainty, Mr. Rubio predicts more traders will follow the early adopters at ELX: "We'll get another bump in January or February, when that next group of people comes online."