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Goldman Sachs and Citadel Securities are among a group of 10 large trading groups backing bond pioneer Howard Lutnick’s renewed tilt on CME’s monopoly on the US Treasury futures market.
The 10 investment banks and proprietary traders are investing a combined $172mn for a 26 per cent stake in Lutnick’s venture, called FMX. The investment will give FMX a valuation of $667mn.
September’s planned launch of futures trading on FMX will mark a third attempt by the Cantor Fitzgerald chair to break the stranglehold of Chicago’s CME Group over the vast Treasury futures market.
Lutnick, who helped usher in electronic government bond trading in the late 1990s, has called CME’s dominance of Treasury futures “one of the great monopolies in America”. Last year, the market traded about $645bn a day.
Futures trading has boomed in recent years as rising US government borrowing has boosted the supply of bonds and leveraged investors have increasingly traded the so-called “basis” to profit from the tiny gaps between futures prices and those of the underlying bonds.
Bank of America, Barclays, Citigroup, Jump Trading, JPMorgan Chase, Morgan Stanley, Tower Research Capital and Wells Fargo are also investing in FMX.
“We offered ownership to this incredible investment group knowing the enormous value they bring to FMX, which will benefit all market participants,” said Lutnick.
FMX is part of brokerage BGC Group, of which Lutnick is chair and chief executive. The platform already trades currencies and cash Treasuries and in January received regulatory approval to trade futures.
FMX has in recent years made inroads into the exchange traded market for Treasuries, taking a 28 per cent market share, largely at the expense of CME’s BrokerTec, the market leader.
Citadel Securities was a supporter of Lutnick’s last attempt to take on the CME in 2007, which failed partly because the venture lost its planned clearing partner. Before that, he had tried in 1998 in partnership with the New York Board of Trade.
FMX’s futures trades will be cleared by LCH, the clearing house controlled by the London Stock Exchange Group.
On an earnings call on Wednesday, CME chief executive Terry Duffy said his exchange was “in a good position” to compete.
“I have sat here for 22 years as the chair and CEO of this company since we went public and I’ve seen nothing but competition. So this is no different. I take every single bit of competition seriously,” he added.
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