NYSE sees potential ally in ELX vs CME

NEW YORK (Reuters) - NYSE Euronext (NYX.N) said it could eventually join forces with ELX Futures LP as the operator of the New York Stock Exchange tries to break CME Group Inc's (CME.O) hold on the Treasury futures market.

ELX is short-sighted to criticize NYSE for taking aim at CME through a clearing venture that could attract traders to its U.S. futures market but locks ELX out for the first two years, NYSE Euronext Chief Operating Officer Lawrence Leibowitz said at the Reuters Global Exchanges and Trading Summit.

"At some point they will most likely be part of this NYPC thing," Leibowitz said of ELX on Monday. "I think if they had a constructive dialogue around it they would see that this is actually in their long-term interest, and it would be very difficult for them to get online sooner."

Leibowitz added there's little reason that futures products should continue to be tied to a single exchange -- a market structure known as non-fungibility. Others told the Summit that fungibility could spark a rush of new U.S. futures venues.

NYPC, which is slated for a third-quarter launch, will initially clear interest-rate futures to be listed on NYSE's U.S. futures exchange, NYSE Liffe US. The parent company has sold stakes in the venture to six large market participants.

The arrangement is designed to slash margins for traders of futures and the underlying securities on which they are based.

Privately owned ELX was not immediately available to comment. The upstart has had limited success since its launch last July in winning market share from CME, which still controls more than 95 percent of the Treasury futures market.

CME owes its continued dominance in part to the fact that futures, unlike stocks, are tied to the exchange at which they originate, Leibowitz said.

That lack of so-called fungibility, or interchangeability, makes it expensive for firms to trade identical or even related contracts at two different markets because they have to put up separate margins for each.

NYSE's clearing venture is a bid to get around that barrier by allowing traders to offset margins put up for Treasury futures against the margins they use to back trades of underlying cash bonds, reducing their overall costs.

"What it really does is give a wedge, more impetus, for someone to want to move out of the CME silo," Leibowitz said. "We think this will give us a legitimate, competitive threat."

Still, NYPC doesn't challenge the underlying market structure that has so far thwarted most competitors to CME: the lack of fungibility in futures.

"It's hard to imagine, particularly in the financial futures markets, why it needs to exist," said Leibowitz, of that lack of fungibility. "But that is the structure in the futures markets, and until that changes, that's the rules of the game."

If the rules were to change, CME's dominance could be challenged on even more fronts.

Joe Ratterman, chief executive of BATS Global Markets, which runs U.S. stock and options exchanges and a European trading facility, said the privately run company would "absolutely" begin trading U.S. futures if the market were to become fungible.

"It may take another few years yet," Ratterman, also at the Summit, said of the transformation.

"There are some strong entrenched positions that are going to fight hard," he added. "We're not the ones busting down those barriers right now, but we're watching carefully for when there are holes in the wall."

NYSE Euronext has sold stakes in its Liffe US derivatives exchange to hedge fund Citadel, Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N), UBS AG (UBSN.VX), and big electronic market makers Getco and DRW Trading Group.

Leibowitz, the former COO at UBS Americas Equities, pointed out that some of those stakeholders, such as Goldman and Getco, also own stakes in ELX.

(Reporting by Ann Saphir and Jonathan Spicer; Editing by Gary Hill)