Upstart ELX adding big-name backer to its battle with CME

ELX Futures is preparing to sign Morgan Stanley to its list of big-name backers as the weeks-old competitor to CME Group Inc. looks to bolster its standing.

New York-based Morgan Stanley would join J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Citadel Investment Group and nine other firms as an investor in the new electronic marketplace as soon as next month, three people with knowledge of the situation said. They declined to be identified because they aren't authorized to speak before the agreement is finalized.

Spokeswomen for Morgan Stanley and ELX declined to comment.

Terms of the deal and the amount of the investment could not be determined.

Adding a new partner — particularly Morgan Stanley, one of the few big Wall Street firms not already on board — is a coup for the New York-based startup, which has won about 2% of the market for U.S. Treasury futures since it opened July 10.

But to truly threaten CME — which dominates the Treasury futures market through its ownership of the Chicago Board of Trade, where the contracts got their start more than 30 years ago — ELX must expand its customer base to include money managers, said Richard Repetto, a New York-based analyst at Sandler O'Neill & Partners LP, who covers exchanges and brokers.

"The real story and platform credibility come when the buy side comes," Mr. Repetto said. The bulk of trading at ELX is conducted by the market's founding members, including Citadel, Breakwater Trading LLC and Global Electronic Trading Co., all based in Chicago. Expanding that circle to other traders "would make me more of a believer," Mr. Repetto said.

ELX Chief Executive Neal Wolkoff, in Chicago last week to host a charity dinner and dance at the CBOT's LaSalle Street building, agreed.

But to go out and woo global money managers "with a straight face," he said, he's got to boost ELX's depth of market — the number of contracts that can be traded at a particular price. ELX on average has about 20% of the depth of market that CME does, he said, and bringing in new trading firms from Chicago will be crucial to that effort.

ELX Chairman and Breakwater founder Tom Rubio said the exchange is making progress on that front already. Since the launch, he said, "a host of new parties are coming in and looking at (joining ELX)." Among those making calls are trading companies and hedge funds, he said. He declined to name any.

Even as ELX tries to pull in more traders, it's looking at branching out.

"The board has asked us to present a formal plan for expanding the product base, and that's our intention over the next several weeks," Mr. Wolkoff said. He declined to detail any potential new products.

Ann Saphir is a reporter at Crain's Chicago Business, a sister publication of Pensions & Investments