UPDATE 1-Upstart ELX latest to take on CME's dominance

* First day turnover close to 20,000 contracts

* Latest in long string of challenges to Chicago dominance

* Lack of fungibility an advantage for market leader (Adds details, background, analyst comment, byline)

By Ros Krasny

CHICAGO, July 10 (Reuters) - ELX Futures LP, the upstart futures exchange that hopes to to challenge the dominance of CME Group (CME.O) opened for business on Friday with modest volume.

Turnover in ELX's U.S. Treasury debt futures through mid-afternoon was 19,478 contracts, the exchange said on its website.

ELX thus grabbed a 1.5 percent market share for those contracts, below the 6 percent share that Eurex US gained when it took on the Chicago Board of Trade in 2004. The CBOT is now part of CME Group.

New York-based ELX has the backing of 13 major banks and brokerage firms, which together represent a sizable share of total U.S. futures activity.

Diego Perfumo, analyst at Equity Research Desk, a Connecticut-based advisory firm, said volume from liquidity providers should create a niche for ELX.

"But I don't think they'll be a major competitor to CME. CME still has the most efficient market, and they are a neutral player." Perfumo said. "Buysiders will go to the most efficient venue, and most likely that venue is not owned by your trading counterparty."

ELX follows in a line of exchanges that have attempted to take on CME or the CBOT -- also with the tacit or active backing of major market players.

Eurex, the German-Swiss exchange owned by Deutsche Boerse, launched its U.S. arm in February 2004 to trade Treasury futures. It later added stock index contracts.

First-day turnover on Eurex U.S. was 39,441 contracts. Within months, daily volume dwindled toward zero.

BrokerTec Futures Exchange, an online futures market set up by leading U.S. brokerage houses, operated between 2001 and 2003 before shutting down as activity dwindled.

CBOT in early 2004 enacted big fee cuts to undermine any pricing advantage that Eurex might have grabbed.

ELX said on Wednesday it would not charge for trades in the month of July. CME could also adjust its trading fees as needed to fend off a challenge.

But its biggest ace in the hole is the lack of fungibility in futures markets. That means that a contract bought on the CME, for example, can not be sold on another exchange.

The lack of fungibility contrasts to U.S. equity options, where seven exchanges currently fight for a slice of the pie.

CME shares hit a two-month low on Friday at $255.00, ending down 1.56 percent or $4.17 at $263.18.

(Additional reporting by Jonathan Spicer in New York, editing by Leslie Gevirtz)