Electronic Liquidity Exchange

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The Electronic Liquidity Exchange (ELX) is the newest name of a planned new electronic trading platform backed by eSpeed and a consortium of 12 banks and market-makers, designed in part to challenge the near-monopoly of the Chicago Mercantile Exchange in US futures trading. Four Seasons was the working title for ELX, but it has also been called the ESX and the Fledgling Futures Exchange by some industry watchers, ahead of a formal naming.

The consortium includes Bank of America, Citigroup, JP Morgan and Chicago-based Citadel Investment Group, among others.

The planned venture, announced in December 2007, is the latest in a line of attempts to challenge the pre-eminence of the Chicago exchanges, though details have yet to emerge on its structure and products, as well as issues such as clearing. The IntercontinentalExchange has also held talks with the backers about possible involvement in the venture^[1].

In July 2008 ELX announced it had signed an agreement to have the National Futures Association provide market surveillance and oversight.^[2]

Background

The venture was announced by eSpeed on December 21, 2007. The US technology provider aimed to provide the platform for the exchange and take a 25 percent stake, though total investment has not been disclosed.

The other backers are Bank of America; Barclays; Barclay Capital; Citadel Investment Group; Citigroup; Credit Suisse; Deutsche Bank; Getco; JPMorgan; Merrill Lynch; Peak6 and Royal Bank of Scotland. Espeed said additional partners and unspecified "new features" would be added in 2008, while the choice of a clearing partner would be a “competitive process”^[3].

Paul Saltzman, chief operating officer of eSpeed, was appointed as acting chief executive, pending a meeting of the group's board in early 2008 to name the venture and appoint management. However, Salzman stepped down from the role in early 2008 – while remaining at eSpeed – and the other partners have yet to make any official comment on the plan^[4].

Another setback for ELX was the appointment of Thomas F. Callahan, Merrill Lynch's ELX pointman, as executive vice president of NYSE Euronext, head of U.S. futures.^[5]

The backers have steered clear on identifying the CME Group as a direct competitor, though efforts to start a lower-cost platform highlight the concerns expressed by users during the CME’s takeover battle for the Chicago Board of Trade. Banks, mindful of CME Group’s push into the OTC market, suggested the enlarged CME would have monopoly pricing power, a charge denied by the CME^[6].

The absence of such pricing power and the potential for market entry were cited by the US Department of Justice in its approval for the CME-CBOT merger^[7].

The new exchange marks the latest effort to challenge the Chicago exchange complex, following unsuccessful efforts by Cantor Exchange - a joint venture between the New York Board of Trade and eSpeed’s owner, specialist trading group Cantor Fitzgerald in 1999 - BrokerTec Futures Exchange in 2001 and Eurex US in 2004. The latter has since been restructured as the US Futures Exchange.

Eurodollar contracts - a stronghold of the CME - are reportedly among the products being considered^[8].