Bond pioneer Howard Lutnick is poised for a third attempt to break CME’s stranglehold on Treasury futures trading, taking on what he calls “one of the great monopolies in America” with a rival marketplace.
The Cantor Fitzgerald chair, who first shook up US bond markets with the eSpeed electronic trading platform in the late 1990s, told an industry conference that Cantor-controlled broker BGC Partners has now sought all the approvals needed for its new venture and he expects the official green light shortly.
But Lutnick faces a formidable adversary in CME Group, whose $67bn valuation makes it the world’s largest exchanges group by market capitalisation. Its suite of interest rate products, which includes Treasury futures, is its biggest revenue generator.
Trading in Treasury futures has soared in recent years to about $550bn per day, according to CME Group calculations based on data from financial regulators. Last year, volumes passed those in actual Treasury bonds for the first time.
While independent market share data is not readily available, the CME has an overwhelming dominance in the market for Treasury futures, which are used to help investors bet on interest rate moves or hedge their portfolios against the risk of rate moves.
“Banks and professional trading firms are going to be committed with serious money. And we together are going to go after one of the great monopolies in America,” Lutnick told the Piper Sandler Global Exchanges conference in New York last week.
Lutnick and others have tried in the past to break CME’s grip, but traders have preferred the deeper and more liquid markets in Chicago as it is easier to buy and sell large amounts with minimal impact on prices.
Investors can also concentrate their portfolios in one place and offset their positions at the clearing house, saving them having to deploy millions of dollars a day in collateral, the insurance required to back their deals.
Lutnick says he has learned from past mistakes, notably a failed joint venture in 2007 with Ken Griffin’s Citadel Securities.
“The market has been littered with mistakes and people tried it — I tried it. When I lost my clearer I wasn’t vertically integrated. So I had an inferior product,” he said.
This time he has LCH, the world’s largest clearing house, as a partner, he said. BGC’s platform is to be called FMX and is due to launch in the third quarter. LCH is controlled by London Stock Exchange Group.
Longtime CME chair Terry Duffy was relaxed when asked about FMX.
“I’ve known Howard for a lot of years, and I’m sure he’s looking at our complex and saying, ‘yeah, you got 67 per cent operating margins’,” he told the Financial Times. “We’re not going to lay down and say ‘take it’. We will be very aggressive in protecting our franchise and building it at the same time.”
Duffy added: “As long as everybody’s playing by the same set of rules, I’m fine with whoever wants to compete with us.”
Lutnick highlighted BGC’s success since 2018 in building a new platform for Treasury bond trading, where he said BGC had taken market share from CME’s BrokerTec business.
“He [Lutnick] has all the components that could make it a success,” said one analyst familiar with both companies. “But a number of people have tried to crack the CME fortress and no one has yet done it.”
Previous challengers to Chicago’s futures flagship include Treasuries trading platform BrokerTec — now part of CME — as well as Deutsche Börse’s Eurex platform, the New York Stock Exchange and Lutnick.
Chicago has fought hard to hold on to its flagship financial products. Before Lutnick’s 2007 effort, he was chief executive of Cantor Fitzgerald in 1998 when it offered Treasury futures in conjunction with the New York Board of Trade, home to cotton and coffee trading as well as the orange juice futures that featured in the 1983 film Trading Places.
The fightback then from the Chicago Board of Trade, home of Treasury futures and now part of CME, included appealing against Cantor’s regulatory approval, calling it “capricious”, and a threat by CBOT to launch its own trading of NYBOT’s prized coffee and cotton contracts among others.
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