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Goldman seen joining bank-owned futures exchange
March 4, 2008 / 4:36 PM / in 10 years

Goldman seen joining bank-owned futures exchange

NEW YORK (Reuters) - U.S. investment bank Goldman Sachs Group Inc (GS.N) is considering joining a dozen banks and trading firms working to launch a futures exchange that would compete with the Chicago Mercantile Exchange, people familiar with the situation said on Tuesday.

<p>Traders and clerks at the Chicago Mercantile Exchange in Chicago, Illinois, signal orders January 30, 2008. U.S. investment bank Goldman Sachs Group Inc. is considering joining a dozen banks and trading firms working to launch a futures exchange that would compete with the Chicago Mercantile Exchange, people familiar with the situation said on Tuesday. REUTERS/Frank Polich</p>

In December, 12 companies including JPMorgan Chase & Co (JPM.N), Merrill Lynch & Co MER.N and Chicago hedge fund Citadel Investment Group announced they were forming an all-electronic futures exchange.

In recent weeks there’s been growing speculation that a new round of banks, including Goldman, Lehman Brothers LEH.N, UBS UBSN.VX and Morgan Stanley (MS.N), would join the group. Goldman Sachs declined to comment.

An official announcement setting the group’s name, chief executive and final investor list is expected in the next week, preferably ahead of the Futures Industry Association annual meeting in Boca Raton, Florida, which begins March 12.

A spokesman for the group, which includes Bank of America (BAC.N), Credit Suisse CSGN.VX, Barclays Plc (BARC.L), Citigroup Inc (C.N), Deutsche Bank AG (DBKGn.DE), GETCO LLC, PEAK6 and Royal Bank of Scotland Group Plc (RBS.L), declined to comment.

The exchange -- operating for now with the working name “Four Seasons” -- would provide a low-cost alternative to CME Group CME.N, which dominates trading in U.S. financial derivatives.

The proposed mart, in the final stages of recruiting a CEO and hammering out other operational issues, previously said it would launch trading of U.S. Treasury futures early this year.

“Goldman is a formidable addition to Four Seasons due to its heft and its track record of spurring competition,” Fox-Pitt Kelton analyst Ed Ditmire wrote in a research note. Ditmire warned that a competitive threat could weigh on CME shares.

ESpeed ESPD.O, an interdealer bond brokerage run by Cantor Fitzgerald, has been a driving force behind the exchange and will provide the trading technology. ESpeed owns about 25 percent of the new exchange.

Paul Saltzman, who was chief operating officer of eSpeed until January, had been the market’s acting chief executive. Saltzman left his exchange post when he quit eSpeed, which will soon be merged into Cantor-owned BGC Partners. ESpeed declined to comment.

Possible contenders for CEO, according to market speculation, include Gerald Putnam, who led electronic stock market Archipelago before its merger with the New York Stock Exchange, and former Chicago Board of Trade chief Bernie Dan.

The proposed exchange is the latest attempt by large banks to break the grip on U.S. derivatives trading held by the Chicago Mercantile Exchange and the CBOT, which merged last year to form CME Group.

The Chicago marts have a lock on trades in Treasuries, Eurodollar and fed funds futures contracts.

In 2001 many of the same banks banded behind BrokerTec Futures Exchange, and predicted they would command up to 70 percent of market share in Chicago’s markets within two years. Instead, BFE closed its doors in November 2003 when trading business proved disappointing.

Markets have changed dramatically in the past few years. Electronic trading has largely supplanted traditional open-outcry exchanges using human market-makers, which are slower and tend to charge higher fees.

And with large Wall Street firms controlling a growing portion of trading activity, these banks can steer their orders to an exchange where they have an ownership interest -- or negotiate better terms with established marts.

Banks have used their clout to launch such successful marts as Nasdaq (NDAQ.O), IntercontinentalExchange (ICE.N) and Archipelago. They’re also challenging established exchanges for handling U.S. and European block, options and stock trades.

Additional reporting by Ros Krasny; Editing by Steve Orlofsky

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