Wall Street loosens ties with CME rival ELX

CHICAGO (Reuters) - The Wall Street powerhouses that founded ELX Futures LP to combat CME Group Inc (CME.O)'s virtual monopoly in Treasury futures are cutting their ownership stakes in the tiny exchange, where trading volumes were battered by last fall's failure of MF Global Holdings (MFGLQ.PK).

"We're working on a new capital structure for ELX," its new chief executive, Rich Jaycobs, told Reuters on Monday, in his first public interview since taking the job on Jan 20.

He declined to give any details, but said ELX is seeking partners for a structure that will rely less on dealers and more on fund managers and other end-users for business.

"To the extent that there's a theory you can depend on the dealer community exclusively to provide your volume and open interest and customer base, I just don't think there's any history, not just ELX but in any marketplace, where that's been sufficient," Jaycobs said. "What we are recognizing is that maybe we need to create incentive programs that involve others."

Launched in July 2009 by a consortium that included Goldman Sachs, J.P. Morgan, Morgan Stanley and other major banks, ELX was touted as a low-cost alternative to the dominant player, CME. It offered cheaper fees, and had high-frequency trading firms provide bids and offers that were designed to match those at its larger rival.

But ELX never won more than a few percentage points of market share from CME, whose hold in Treasury futures dates to the 1970s when its Chicago Board of Trade created the contracts.

For most of 2011, ELX handled more than 1 million contracts a month - less than what CME handles on an average day.

After MF Global's failure on October 31, trading at ELX plummeted, with only 618,000 contracts changing hands in November and just 310,000 in December. Trading also fell because founding members had already met volume thresholds under ELX incentive programs earlier in the year.

About 352,000 contracts have traded so far in January.

BGC STEPS UP

ELX had been weighing strategic initiatives since well before MF Global's collapse, according to Breakwater Trading LLC chief Tom Rubio, a co-founder of ELX and its first chairman.

The exchange decided against selling out to a rival market because of worries it would not fetch a decent price amid sagging shares across the industry, he said.

Instead, the ELX board approved an arrangement by which dealers and other founding members give up a portion of their ownership stakes to brokerage BGC Partners, which runs ELX's electronic trading system and was also a founding investor.

BGC will eventually parcel out those shares to newcomers who promise to bring business to the market, Rubio said.

Now that BGC Partners has stepped in and dealers have stepped back, ELX has a new lease on life, according to Rubio.

"From the financial crisis to MF Global to regulation, there have been a lot of headwinds," Rubio said. "But a year from now, the business will be more stable."

Jaycobs, who declined to comment on the accuracy of Rubio's description of the ownership changes, said he will focus on delivering more than just a low-cost option to traders.

Among his goals, he said, is turning ELX into a "full-service" exchange that offers a broader array of contracts than just interest-rate futures, and making inroads far beyond the narrow base of dealers and trading firms that founded it.

"A lot of markets start with the assumption that their investor base will provide everything they need," he said. "But history doesn't bear that out."

(Reporting by Ann Saphir; Editing by Leslie Adler)